MERCANTILE LAW

2014 BAR EXAMINATIONS

A. Letters of Credit
1. Definition/Concept
That issued by one merchant to another for the purpose of attending to a commercial
transaction.1
An instrument issued by a bank on behalf of one of its customers, authorizing an individual
or a firm to draw drafts on the bank or one of its correspondents for its account under certain
conditions of the credit.2
An engagement by a bank or other person made at the request of a customer that the issuer
will honor drafts or other demands for payment upon compliance with the conditions specified in
the credit.3 Through it, the bank merely substitutes its own promise to pay for the promise to pay of
one of its customers who in return promises to pay the bank the amount of funds mentioned in the
letter of credit plus credit or commitment fees mutually agreed upon.
2. Governing laws
a. Code of Commerce
b. Uniform Customs and Practice for Documentary Credits4
3. Nature of letter of credit
The LC is a financial device5developed as a convenient and relatively safe mode of dealing
with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part
with his goods before he is paid, and a buyer, who wants to have control of the goods before paying.
4. Parties to a letter of credit
There are at least 3 basic parties:
1. Applicant/buyer/importer one who purchases the goods, procures the LC, and obliges
himself to reimburse the issuing bank upon receipt of the documents of title.
2. Issuing/opening bank one which issues the LC, and undertakes to pay the seller upon
receipt of the draft and proper documents of title from the seller and to surrender them to
the buyer upon reimbursement; and
1

Art. 567
Commercial Law Review, C. Villanueva, 2004 ed.
3
Prudential Bank vs. CA, 216 SCRA 257
4
The Uniform Commercial Practice for Documentary Credits allow Letters of Credit to be payable to order.
5
mode of payment
2

3. Seller/exporter/beneficiary one who sells the goods to the buyer, and who delivers the
draft and documents to the issuing bank to recover payment.
The number of parties may be increased. Modern letters of credit are usually not made
between natural persons. They involve bank-to-bank transactions.
4. Advising/notifying bank the correspondent bank of the opening bank through which it
advises the beneficiary of the LC.
5. Confirming bank bank which, upon the request of the beneficiary, confirms the LC issued.
6. Paying bank bank on which the drafts are to be drawn, which may be the opening bank or
another bank not in the city of the beneficiary.
7. Negotiating bank bank in the city of the beneficiary which buys or discounts the drafts
contemplated by the LC, if such draft is to be drawn on the opening bank or on another
designated bank not in the city of the beneficiary.
a. Rights and obligations of parties
1. Drawer is liable to person on whom it was issued provided identity proven, for the
amount paid within fixed maximum.
2. Bearer has no right of action if not paid by person who issued it.
3. Drawer may annul the letter of credit, informing the bearer and to whom it is
addressed.
4. Bearer shall pay the amount received to drawer, otherwise action for execution may be
filed with interest and current exchange in place where payment made on place where repaid.
5. If a bearer does not make use of letter of credit within agreed period, or if none, within 6
months from date if in the Philippines, and 12 months if outside the Philippines, it shall be void.6
5. Basic Principles of letter of credit
a. Doctrine of independence
The 3 basic contracts are distinct and independent, and the undertakings of the respective
parties in each are neither subject to claims and defenses nor affected by the breach in the others.
b. Fraud exception principle
Exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents
to the confirming bank, documents that contain, expressly or by implication, material
representations of fact that to his knowledge are untrue.
6

Articles 569-572, Code of Commerce

c. Doctrine of strict compliance

It espouses that the documents tendered by the seller/beneficiary must strictly conform to
the terms of the LC, i.e. they must include all the documents required by the LC.7
B. Warehouse Receipts Law
Warehousemans Lien
The warehousemans lien on the good deposited or on the proceeds thereof in his hands
consists of all lawful charges for storage and preservation of the goods, all lawful claims for money
advanced, interest, insurance, transportation, labor, weighing, coopering, and other charges and
expenses in relation to such goods, also all reasonable charges and expenses for notices and
advertisements of sale, and for the sale of the goods where default has been made in satisfying the
warehousemans lien.
C. Trust Receipts Law
1. Definition/Concept of a Trust Receipt Transaction
A trust receipt transaction is any transaction by and between a person referred to as the
entruster, and another person referred to as entrustee, whereby the entruster, who owns or holds
absolute title or security interests over certain specified goods, documents or instruments, releases
the same to the possession of the entrustee upon the latter's execution and delivery to the entruster
of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the
designated goods, documents or instruments in trust for the entruster and to sell or otherwise
dispose of the goods, documents or instruments with the obligation to turn over to the entruster the
proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt
or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of,
in accordance with the terms and conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:
1. In the case of goods or documents
a) to sell the goods or procure their sale; or
b) to manufacture or process the goods with the purpose of ultimate sale. In the case of
goods delivered under trust receipt for the purpose of manufacturing or processing before its
ultimate sale, the entruster shall retain its title over the goods whether in its original or processed
form until the entrustee has complied fully with his obligation under the trust receipt; or
c) to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or
necessary to their sale; or
2. In the case of instruments,
7

Feati Bank vs. CA

a) to sell or procure their sale or exchange; or

b) to deliver them to a principal; or
c) to effect the consummation of some transactions involving delivery to a depository or
register; or
d) toeffect their presentation, collection or renewal.
The sale of goods, documents or instruments by a person in the business of selling goods,
documents or instruments for profit who, at the outset of the transaction, has, as against the buyer,
general property rights in such goods, documents or instruments, or who sells the same to the buyer
on credit, retaining title or other interest as security for the payment of the purchase price, does not
constitute a trust receipt transaction and is outside the purview and coverage of the Decree. 8
a. Loan/security feature
This is not a simple loan transaction between a creditor and debtor-importer.
The law warrants the validity of the entrusters security interest as against the creditors of the trust
receipt agreement.
b. Ownership of the goods, documents and instruments under a trust
receipt
Goods are owned by the bank, and are only released to the importer in trust after the grant
of the loan. The bank acquires a security interest in the goods as holder of a security title for the
advances it made to the entrustee.
Entrustee must deliver money or return unsold goods to entrustor
Bank is preferred over other creditors.
Bank is also not liable to buyer of goods as vendor
Purchaser from entrustee gets good title.
No particular form is required for trust receipt
2. Rights of the Entruster9
The entruster shall be entitled to the proceeds from the sale of the goods, documents or
instruments released under a trust receipt to the entrustee to the extent of the amount owing to the
entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments
in case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt
provided such are not contrary to the provisions of this Decree.
The entruster may cancel the trust and take possession of the goods, documents or
instruments subject of the trust or of the proceeds realized therefrom at any time upon default or
failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any
other agreement between the entruster and the entrustee, and the entruster in possession of the
goods, documents or instruments may, on or after default, give notice to the entrustee of the
8

Sec. 4
Entruster" shall refer to the person holding title over the goods, documents, or instruments subject of a trust
receipt transaction, and any successor in interest of such person.
9

intention to sell, and may, not less than five days after serving or sending of such notice, sell the
goods, documents or instruments at public or private sale, and the entruster may, at a public sale,
become a purchaser. The proceeds of any such sale, whether public or private, shall be applied (a) to
the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and
storing the goods, documents or instruments; (c) to the satisfaction of the entrustee's indebtedness
to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any
deficiency. Notice of sale shall be deemed sufficiently given if in writing, and either personally served
on the entrustee or sent by post-paid ordinary mail to the entrustee's last known business address.
a. Validity of the security interest as against the creditors of the
entrustee/innocent purchasers for value
The entruster's security interest in goods, documents, or instruments pursuant to the written
terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the
trust receipt agreement.
3. Obligations and Liability of the Entrustee
The entrustee shall (1) hold the goods, documents or instruments in trust for the entruster
and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt;
(2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the
extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods
for their total value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or
proceeds thereof whether in money or whatever form, separate and capable of identification as
property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or
upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not
contrary to the provisions of this Decree.
The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments
which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it
was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster
for the value thereof.
a. Payment/Delivery of proceeds of sale or disposition of goods,
documents or instruments
Keep said goods or proceeds separate and capable of identification.
b. Return of goods, documents or instruments in case of sale
Return the goods, documents or instruments in the event of non-sale or upon demand.
c. Liability for loss of goods, documents or instruments
The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments
which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it

was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster
for the value thereof.10
d. Penal sanction if offender is a corporation
If the violation or offense is committed by a corporation, partnership, association or other
juridical entities, the penalty provided for in this Decree shall be imposed upon the directors,
officers, employees or other officials or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal offense.11
4. Remedies available
The entrustor can:
a. Cancel trust and take possession of the goofs
b. File a 3rd party claim or separate civil action at any time upon default or failure of
entrustee to comply with terms and conditions of the trust agreement.12
D. Negotiable Instruments Law13
1. Forms and Interpretation
a. Requisites of Negotiability
1. Must be in writing and signed by the maker or drawer;14
10

Sec. 10
Sec. 13, last sen.
12
Prudential Bank vs. NLRC, 251 SCRA 421, 1995
Failure to turn over proceeds of the sale of goods or to return unsold goods is a public nuisance to be abated by
the imposition of penal sanctions (Tiomico vs. Court of Appeals, 1999)
The offense is malumprohibitum. There is no need to prove damage to the entrustor. (Metropolitan Bank vs.
Tonda, 2000), or intent to defraud (People vs. Cuervo, 1981)
Offense: estafa under Art 315 of the Revised Penal Code.
13
Negotiable instrument (NI)
A written contract for the payment of money which complies with the requirements of Sec. 1 of the NIL, which
by its form and on its face, is intended as a substitute for money and passes from hand to hand as money, so as to
give the holder in due course (HDC) the right to hold the instrument free from defenses available to prior parties.
(Reviewer on Commercial Law, Professors Sundiang and Aquino)
14
Any kind of material that substitutes paper is sufficient.
With respect to the signature, it is enough that what the maker or drawer affixed shows his intent to
authenticate the writing. (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents,
Timoteo B. Aquino)
Signature, binding so long it is intended or adopted as the signature of the signer or made with his authority.
No person liable on the instrument whose signature does not appear thereon.
One who signs in a trade or assumed name liable to same extent as if he had signed in his own name. (Sec. 18,
NIL)
Signature of party may be made by duly authorized agent; no particular form of appointment necessary. (Sec.
19, NIL)
11

2.
3.
4.
5.

Must contain an unconditional promise or order to pay a sum certain in money;15

Must be payable on demand, or at a fixed or determinable future time;
Must be payable to order or to bearer;16 and
When the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.17

"In writing" - includes print; written or typed

Where the promise or order is made to depend on a contingent event, it is conditional, and the instrument
involved is non-negotiable. The happening of the event does not cure the defect.
The unconditional nature of the promise or order is not affected by:
a) An indication of a particular fund out of which reimbursement is to be made, or a particular account to be
debited with the amount; or
b) A statement of the transaction which gives rise to the instrument
Where the promise or order is subject to the terms and conditions of the transaction stated, the instrument is
rendered non-negotiable. The NI must be burdened with the terms and conditions of that agreement to destroy its
negotiability. (Cesar Villanueva, Commercial Law Review, 2004 ed.)
But an order or promise to pay out of a particular fund is NOT unconditional. (Sec. 3)
The dates of each installment must be fixed or at least determinable and the amount to be paid for each
installment.
A sum is certain if the amount to be unconditionally paid by the maker or drawee can be determined on the face
of the instrument and is not affected by the fact that the exact amount is arrived at only after a mathematical
computation. (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B.
Aquino)
16
The instrument is payable to order where it is drawn payable to the order of a specified person, or to him or his
order. (Sec. 8)
The payee must be named or otherwise indicated therein with reasonable certainty.
The instrument may be made payable to the order of:
a. A payee who is not the maker, drawer or drawee
b. The drawer or maker
c. The drawee
d. 2 or more payees jointly
e. One or some of several payees
f. The holder of an office for a time being
Payable to Bearer
The instrument is payable to bearer:
a. When it is expressed to be so payable; or
b. When it is payable to a person named therein or to bearer; or
c. When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person
making it so payable; or
d. When the name of the payee does not purport to be the name of any person; or
e. When the only or last indorsement is an indorsement in blank. (Sec. 9)
An instrument originally payable to bearer can be negotiated by mere delivery even if it is indorsed especially. If
it is originally a BEARER instrument, it will always be a BEARER instrument.
As opposed to an original order instrument becoming payable to bearer, if the same is indorsed specially, it can
no longer be negotiated further by mere delivery, it has to be indorsed.
A check that is payable to the order of cash is payable to bearer. Reason: The name of the payee does not purport
to be the name of any person. (AngTekLian vs. CA, 87 Phil. 383)
Fictitious payee rule:
It is not necessary that the person referred to in the instrument is really non-existent or fictitious to make the
instrument payable to bearer. The person to whose order the instrument is made payable may in fact be existing
but he is till fictitious or non-existent under Sec. 9(c) of the NIL if the person making it so payable does not intend
to pay the specified persons. (Reviewer on Commercial Law, Professors Sundiang and Aquino)
15

b. Kinds of negotiable instrument

Promissory note - an unconditional promise in writing by one person to another signed by
the maker engaging to pay on demand or at a fixed or determinable future time, a sum certain in
money to order or to bearer. (Sec. 184)
Bill of exchange - an unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at
a fixed or determinable future time a sum certain in money to order or to bearer.18
Check- a bill of exchange drawn on a bank payable on demand.19 It is the most common
form of bill of exchange.
2. Completion and delivery
a. Insertion of date
Where an instrument expressed to be payable at a fixed period after date is issued undated,
or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder
may insert therein the true date of issue or acceptance, and the instrument shall be payable
accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a
subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true
date.20
b. Completion of blanks
Where the instrument is wanting in any material particular, the person in possession thereof
has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank
paper delivered by the person making the signature in order that the paper may be converted into a
negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In
order, however, that any such instrument when completed may be enforced against any person who
became a party thereto prior to its completion, it must be filled up strictly in accordance with the
authority given and within a reasonable time. But if any such instrument, after completion, is
negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he
may enforce it as if it had been filled up strictly in accordance with the authority given and within a
reasonable time.21

17

Applicable only to a bill of exchange

A bill may be addressed to 2 or more drawees jointly whether they are partners or not but not to 2 or more
drawees in the alternative or in succession. (Sec. 128)
18
Sec. 126
19
Sec. 185
20
Sec. 13
21
Sec. 14

c. Incomplete and undelivered instruments

If completed and negotiated without authority, not a valid contract against a person who has
signed before delivery of the contract even in the hands of a holder in due course but subsequent
indorsers are liable. This is a real defense.22
d. Complete but undelivered instruments
1. Between immediate parties and those who are similarly situated, delivery must be
coupled with the intention of transferring title to the instrument.
2. As to a holder in due course, it is conclusively presumed that there was valid delivery;
and
3. As against an immediate party and remote party who is not aholder in due course,
presumption of a valid and intentional delivery is rebuttable.23
3. Rules of interpretation
a. Discrepancy between the amount in figures and that in words the words prevail, but if
the words are ambiguous, reference will be made to the figures to fix the amount.
b. Payment for interest is provided for interest runs from the date of the instrument, if
undated, from issue thereof.
c. Instrument undated consider date of issue.
d. Conflict between written and printed provisions written provisions prevail.
e. When the instrument is so ambiguous that there is doubt whether it is a bill or note, the
holder may treat it as either at his election;
f. If one signs without indicating in what capacity he has affixed his signature, he is
considered an indorser.
g. If two or more persons sign We promise to pay, their liability is joint (each liable for his
part) but if they sign I promise to pay, the liability is solidary (each can be compelled to comply with
the entire obligation).24
4. Signature
a. Signing in trade name
One who signs in a trade or assumed name will be liable to the same extent as if he had
signed in his own name.25
22

Sec. 15
Sec. 16
24
Sec. 17
25
Sec. 18
23

b. Signature of agent
The signature of any party may be made by a duly authorized agent. No particular form of
appointment is necessary for this purpose; and the authority of the agent may be established as in
other cases of agency.26
Where the instrument contains or a person adds to his signature words indicating that he
signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument
if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a
representative character, without disclosing his principal, does not exempt him from personal
liability.27
c. Indorsement by minor or corporation
The indorsement or assignment of the instrument by a corporation or by an infant passes
the property therein, notwithstanding that from want of capacity, the corporation or infant may
incur no liability thereon.28
d. Forgery29
Counterfeit making or fraudulent alteration of any writing, which may consist of:
1. Signing of anothers name with intent to defraud; or
2. Alteration of an instrument in the name, amount, name of payee, etc. with intent to
defraud.30
General Rule:
When a signature is forged or made without the authority of the person, the signature31 is
wholly inoperative.32
Exception:
Unless the party against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority.33
26

Sec. 19
Sec. 20
28
Sec. 22
29
Persons precluded from setting up defense of forgery
1. Those who warrant or admit the genuineness of the signature in question. This includes indorsers, persons
negotiating by delivery and acceptors.
2. Those who, by their acts, silence, or negligence, are estopped from setting up the defense of forgery.
30
1 Agbayani, 1992 ed.
31
not instrument itself and the genuine signatures
32
Legal Effects:
1. No right to retain the instrument
2.To give a discharge therefore
3. To enforce payment thereof against any party thereto, can be acquired through or under such signature
27

10

5. Consideration
Every negotiable instrument is deemed prima facie to have been issued for a valuable
consideration. Every person whose signature appears thereon is presumed to have become a party
thereto for value.34
6. Accommodation party
One who has signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other person. Such a
person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of
taking the instrument, knew him to be only an accommodation party.35
7. Negotiation
a. Distinguished from assignment
Negotiation the transfer of the instrument from one person to another so as to constitute
the transferee as holder thereof.36
Assignment The transferee does not become a holder and he merely steps into the shoes
of the transferor. Any defense available against the transferor is available against the transferee. 37
b. Modes of negotiation
a. Issuance first delivery of the instrument complete in form to a person who takes it as a

38

holder.

b. Subsequent Negotiation
1. If payable to bearer, a negotiable instrument may be negotiated by mere delivery.
2. If payable to order, a NI may be negotiated by indorsement completed by delivery.39

33

Sec. 23
Sec. 24
What constitutes value:
a. An antecedent or pre-existing debt
b. Value previously given
c. Lien arising from contract or by operation of law. (Sec. 27)
35
Sec. 29
36
Sec.30
37
Timoteo B. Aquino, Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents
Assignment may be effected whether the instrument is negotiable or non-negotiable. (Sesbreo vs. CA, 222
SCRA 466)
38
Sec. 191
Steps:
1. Mechanical act of writing the instrument completely and in accordance with the requirements of Section 1;
and
2. The delivery of the complete instrument by the maker or drawer to the payee or holder with the intention of
giving effect to it. (The Law on Negotiable Instruments with Documents of Title, Hector de Leon, 2000 ed.)
34

11

c. Incomplete negotiation of order instrument

Where the holder of an instrument payable to his order transfers it for value without
indorsing it, the transfer vests in the transferee such title as the transferor had therein and he also
acquires the right to have the indorsement of the transferor. But for the purpose of determining
whether the transferee is a holder in due course, the negotiation takes effect as of the time when the
indorsement is made.40
d. Indorsement
Legal transaction effected by the affixing one's signature at the:
a. Back of the instrumentor
b. Upon a paper41 attached thereto with or without additional words specifying the person to
whom or to whose order the instrument is to be payable whereby one not only transfers legal title to
the paper transferred but likewise enters into an implied guaranty that the instrument will be
duly paid.42
8. Rights of the Holder43
a. Holder in Due Course44
1. May sue on the instrument in his own name;
2. May receive payment and if payment is in due course, the instrument is discharged;
3. Holds the instrument free from any defect of title of prior parties and free from defenses
available to parties among themselves; and
4. May enforce payment of the instrument for the full amount thereof against all parties
liable thereon.45
39

In both cases, delivery must be intended to give effect to the transfer of instrument. (Development Bank vs. Sima
Wei, 219 SCRA 736)
40
Sec. 49
41
allonge
42
Sec. 31
General rule: Indorsement must be of the entire instrument.
Exception: Where instrument has been paid in part, it may be indorsed as to the residue. (Sec. 32)
43
Holder - a payee or endorsee of a bill or note who is in possession of it or the bearer thereof. (Sec. 191)
44
A holder who has taken the instrument under the following conditions:
1 .Instrument is complete and regular upon its face;
2. Became a holder before it was overdue and without notice that it had been previously dishonored;
3 For value and in good faith; and
4. At the time he took it, he had no notice of any infirmity in the instrument or defect in the title of the person
negotiating it. (Sec. 52)
Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this presumption
arises only in favor of a person who is a holder as defined in Section 191 of the NIL. The weight of authority
sustains the view that a payee may be a holder in due course. Hence, the presumption that he is a prima facie
holder in due course applies in his favor. (Cely Yang vs. Court of Appeals, G.R. No. 138074, August 15, 2003)
45
Secs. 51 and 57

12

b. Defenses against the Holder

In the hands of any holder other than a holder in due course, a negotiable instrument is
subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a
holder in due course, and who is not himself a party to any fraud or illegality affecting the
instrument, has all the rights of such former holder in respect of all parties prior to the latter.
9. Liabilities of Parties
a. Maker
The maker of a negotiable instrument, by making it, engages that he will pay it according to
its tenor, and admits the existence of the payee and his then capacity to indorse.
b. Drawer
The drawer by drawing the instrument admits the existence of the payee and his then
capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid,
or both, according to its tenor, and that if it be dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser
who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation
negativing or limiting his own liability to the holder.
c. Acceptor
The acceptor, by accepting the instrument, engages that he will pay it according to the tenor
of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and
authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
d. Indorser
Where a person, not otherwise a party to an instrument, places thereon his signature in blank
before delivery, he is liable as indorser, in accordance with the following rules:
(a) If the instrument is payable to the order of a third person, he is liable to the payee and to
all subsequent parties.
(b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer,
he is liable to all parties subsequent to the maker or drawer.
(c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to
the payee.
Where a person places his indorsement on an instrument negotiable by delivery, he incurs all
the liability of an indorser.

13

e. Warranties
Every person negotiating an instrument by delivery or by a qualified indorsement warrants:
(a) That the instrument is genuine and in all respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity of the instrument
or render it valueless.
But when the negotiation is by delivery only, the warranty extends in favor of no holder
other than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to a person negotiating public
or corporation securities other than bills and notes.
Every indorser who indorses without qualification, warrants to all subsequent holders in due
course:

a) That the instrument is genuine and in all respects what it purports to be;
b) That he has a good title to it;
c) That all prior parties had capacity to contract;
d) That the instrument is, at the time of his indorsement, valid and subsisting;and
e) He engages that, on due presentment, it shall be accepted or paid, or both, as the case may
be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be
duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be
compelled to pay it.
10. Presentment for Payment
The production of a Bill of Exchange to the drawee for his acceptance, or to the drawee or
acceptor for payment or the production of a Promissory Note to the party liable for the payment of
the same.
a. Necessity of presentment for payment
Presentment for payment is necessary in order to charge the drawer and indorsers.
b. Parties to whom presentment for payment should be made
To the person primarily liable or if he is absent or inaccessible, to any person found at the
place where the presentment is made.
c. Dispensation with presentment for payment
1. In order to charge the drawer where he has no right to expect or require that the drawee
or acceptor will pay the instrument.

14

2. In order to charge an indorser when the instrument was made or accepted for his
accommodation and he has no reason to expect that the instrument will be paid if presented.46
d. Dishonor by non-payment47
1. Payment is refused or cannot be obtained after due presentment for payment;
2. Presentment is excused and the instrument is overdue and unpaid. (Sec. 83)
11. Notice of Dishonor
Notice given by holder or his agent to party or parties secondarily liable that the instrument
was dishonored by non-acceptance by the drawee of a bill or by non-payment by the acceptor of a
bill or by non-payment by the maker of a note.48
a. Parties to be notified
Given to secondary party or his agent.49
b. Parties who may give notice of dishonor
Given by holder or his agent, or by any party who may be compelled by the holder to pay.50
c. Effect of notice
Immediate right of recourse against the drawer and indorsers accrues to the holder and no
presentment for payment is necessary.51
d. Form of notice
1. By bringing verbally or
2. By writing to the knowledge of the person liable the fact that a specified instrument, upon
proper proceedings taken, has not been accepted or has not been paid, and that the party notified is
expected to pay it.
e. Waiver
Either before the time of giving notice, or after the omission to give due notice. Waiver may
be expressed or implied.52
As to who are affected by an express waiver depends on where the waiver is written:
46

Sec. 80
Effect: There is an immediate right of recourse by the holder against persons secondarily liable. However, notice
of dishonor is generally required. (Sec. 84)
48
Sec. 89
49
Sec. 97
50
Sec. 90
51
Sec. 151
52
Sec. 109
47

15

1. If it appears in the body or on the face of the instrument, it binds all parties; but
2. If it is written above the signature of an indorser, it binds him only.53
f. Dispensation with notice
1. When party to be notified knows about the dishonor, actually or constructively;54
2. If waived;55 and
3. When after due diligence, it cannot be given.56
g. Effect of failure to give notice
An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a
holder in due course subsequent to the omission.57
12. Discharge of Negotiable Instrument
a. Discharge of negotiable instrument
A release of all parties, whether primary or secondary, from the obligations arising
thereunder. It renders the instrument without force and effect and, consequently, it can no longer
be negotiated.58
b. Discharge of parties secondarily liable
1. By any act which discharges the instrument;
2. By the intentional cancellation of his signature by the holder;
3. By the discharge of a prior party;
4. By a valid tender of payment made by a prior party;
5. By the release of the principal debtor, unless the holders right of recourse against the
party secondarily liable is expressly reserved;
6. By any agreement binding upon the holder to extend the time of payment or to postpone
the holders right to enforce the instrument.59
c. Right of party who discharged instrument
Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but
the party so paying it is remitted to his former rights as regard all prior parties, and he may strike out
his own and all subsequent indorsements and against negotiate the instrument, except:
(a) Where it is payable to the order of a third person and has been paid by the drawer; and

53

Sec. 110
Secs. 114-117
55
Sec. 109
56
Sec. 112
57
Sec. 117
58
The Law on Negotiable Instruments with Documents of Title, Hector de Leon, 2000 ed.
59
Sec. 120
54

16

(b) Where it was made or accepted for accommodation and has been paid by the party
accommodated.60
d. Renunciation by holder
The holder may expressly renounce his rights against any party to the instrument before, at,
or after its maturity. An absolute and unconditional renunciation of his rights against the principal
debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation
does not affect the rights of a holder in due course without notice. A renunciation must be in writing
unless the instrument is delivered up to the person primarily liable thereon.61
13. Material alteration
a. Concept
Any alteration which changes:
a) The date;
b) The sum payable, either for principal or interest;
c) The time or place of payment:
d) The number or the relations of the parties;
e) The medium or currency in which payment is to be made;
f) Adds a place of payment where no place of payment is specified, or
g) Any other change or addition which alters the effect of the instrument in any respect, is a
material alteration.62
b. Effect of material alteration
Where a negotiable instrument is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the
alteration and subsequent indorsers.
When an instrument has been materially altered and is in the hands of a holder in due course
not a party to the alteration, he may enforce payment thereof according to its original tenor.63

In the following cases, the agreement to extend the time of payment does not discharge a party secondarily
liable:
a) where the extension of time is consented to by such party;
b) where the holder expressly reserves his right of recourse against such party.
Payment at or after maturity by a party secondarily liable does not discharge the instrument. It only cancels his
own liability and that of the parties subsequent to him. (Sec. 121)
60
Sec. 121
61
Sec. 122
62
Sec. 125
63
Sec. 124

17

14. Acceptance
a. Definition
The signification by the drawee of his assent to the order of the drawer.
It is the act by which the drawee manifests his consent to comply with the request contained
in the bill of exchange directed to him.
b. Manner
Must be in writing and signed by the drawee and must not express that the drawee will
perform his promise by any other means than the payment of money.64
The holder of the bill presenting the same for acceptance may require that the acceptance be
written on the bill, and if such request is refused, may treat the bill as dishonored.65
c. Time for acceptance
The drawee is allowed twenty-four (24) hours after presentment in which to decide whether
or not he will accept the bill; the acceptance, if given, dates as of the day of presentation.66
d. Rules governing acceptance
The holder of a bill presenting the same for acceptance may require that the acceptance be
written on the bill, and, if such request is refused, may treat the bill as dishonored.67
Where an acceptance is written on a paper other than the bill itself, it does not bind the
acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the
bill for value.68
An unconditional promise in writing to accept a bill before it is drawn is deemed an actual
acceptance in favor of every person who, upon the faith thereof, receives the bill for value.69
Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses
within twenty-four hours after such delivery or within such other period as the holder may allow, to
return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the
same.70

64

Sec. 132
Sec. 133
66
Sec. 136
67
Sec. 133
68
Sec. 134
69
Sec. 135
70
Sec. 137
65

18

A bill may be accepted before it has been signed by the drawer, or while otherwise
incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or
by nonpayment. But when a bill payable after sight is dishonored by non-acceptance and the drawee
subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the
bill accepted as of the date of the first presentment.71
An acceptance is either general or qualified. A general acceptance assents without
qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of
the bill as drawn.72
An acceptance to pay at a particular place is a general acceptance unless it expressly states
that the bill is to be paid there only and not elsewhere.73
An acceptance is qualified when it is:
(a) Conditional - which makes payment by the acceptor dependent on the fulfillment of a
condition therein stated;
(b) Partial - an acceptance to pay part only of the amount for which the bill is drawn;
(c) Local - an acceptance to pay only at a particular place;
(d) Qualified as to time;
(e) The acceptance of some, one or more of the drawees but not of all.74
The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified
acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is
taken, the drawer and indorsers are discharged from liability on the bill unless they have expressly or
impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. When
the drawer or an indorser receives notice of a qualified acceptance, he must, within a reasonable
time, express his dissent to the holder or he will be deemed to have assented thereto.75
15. Presentment for Acceptance
a. Time/place/manner of presentment
a. Where the bill is payable after sight, or when it is necessary in order to fix the maturity of
the instrument;
b. Where the bill expressly stipulates that it shall be presented for acceptance;
c. Where the bill is drawn payable elsewhere than at the residence or place of business of the
drawee.76
d. Where a bill is addressed to 2 or more drawees who are not partners, presentment must be
made to all.
e. Where drawee is dead, presentment may be made to his personal representative.
71

Sec. 138
Sec. 139
73
Sec. 140
74
Sec. 141
75
Sec. 142
76
Sec. 143
72

19

f. Where the drawee is adjudged a bankrupt, insolvent or made an assignment to his

creditors, presentment may be made to him or his trustee or assignee.
b. Effect of failure to make presentment
The drawer and all indorsers are discharged.77
c. Dishonor by non-acceptance
When duly presented for acceptance acceptance is refused or cannot be obtained; or
When presentment for acceptance is excused bill is not accepted.78
16. Promissory Notes79
An unconditional promise in writing made by one person to another, signed by the maker,
engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to
order or to bearer.
Where a note is drawn to the maker's own order, it is not complete until indorsed by him.80
17. Checks
a. Definition
A bill of exchange drawn on a bank payable on demand.81
b. Kinds82
a. Cashiers Check - one drawn by the cashier of a bank, in the name of the bank against the
bank itself payable to a third person. It is a primary obligation of the issuing bank and accepted in
advance upon issuance.83
b. Managers Check - a check drawn by the manager of a bank in the name of the bank itself
payable to a third person. It is similar to the cashiers check as to the effect and use.
c. Memorandum Check - a check given by a borrower to a lender for the amount of a short
loan, with the understanding that it is not to be presented at the bank, but will be redeemed by the
maker himself when the loan falls due and which understanding is evidenced by writing the word
memorandum, memo or mem on the check.
77

See sec. 144, last sen.

Sec. 149
79
A promise to pay money
80
Sec. 184
81
Sec. 185
82
Cesar Villanueva, Commercial Law Review, 2004 ed.
83
Tan vs. CA, 239 SCRA 310
78

20

d. Certified Check - an agreement whereby the bank against whom a check is drawn
undertakes to pay it at any future time when presented for payment. (Sec. 187)
c. Presentment for payment
(1) Time
A check must be presented for payment within reasonable time after its issue.84
(2) Effect of delay
85

delay.

The drawer will be discharged from liability thereon to the extent of the loss caused by the

E. Insurance Code
1. Concept of Insurance
An agreement whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event.86
2. Elements of an Insurance Contract
1. The insured possesses an insurable interest susceptible of pecuniary estimation;
2. The insured is subject to a risk of loss through the destruction or impairment of that
interest by the happening of designated perils;
3. The insurer assumes that risk of loss;
4. Such assumption is part of a general scheme to distribute actual losses among a large
group or substantial number of persons bearing somewhat similar risks; and
5. The insured makes a ratable contribution (premium) to a general insurance fund.
A contract possessing only the first 3 elements above is a risk-shifting device. If all the elements,
it is a risk-distributing device.87

84

Sec. 186
Ibid
86
Sec. 2, par. 2
87
The Insurance Code of the Philippines Annotated, Hector de Leon, 2002 ed.
85

21

3. Characteristics/Nature of Insurance Contracts

1. Consensual it is perfected by the meeting of the minds of the parties.
2. Voluntary the parties may incorporate such terms and conditions as they may deem
convenient.
3. Aleatory it depends upon some contingent event.
of loss.

4. Unilateral imposes legal duties only on the insurer who promises to indemnify in case

5. Conditional It is subject to conditions the principal one of which is the happening of the
event insured against.
6. Contract of indemnity Except life and accident insurance, a contract of insurance is a
contract of indemnity whereby the insurer promises to make good only the loss of the insured.
7. Personal each party having in view the character, credit and conduct of the other.88
4. Classes
a. Marine89
Insurance against risks connected with navigation, to which a ship, cargo, freightage, profits
or other insurable interest in movable property, may be exposed during a certain voyage or a fixed
period of time.90

88

The Insurance Code of the Philippines Annotated, Hector de Leon, 2002 ed

Coverage:
A.
1. Vessels, goods, freight, cargo, merchandise, profits, money, valuable papers, bottomry and respondentia, and
interest in respect to all risks or perils of navigation;
2.Persons or property in connection with marine insurance;
3. Precious stones, jewels, jewelry and precious metals whether in the course of transportation or otherwise; and
4. Bridges, tunnels, piers, docks and other aids to navigation and transportation. (Sec. 99)
Cargo can be the subject of marine insurance, and once it is entered into, the implied warranty of seaworthiness
immediately attaches to whoever is insuring the cargo, whether he be the shipowner or not. (Roque v. IAC, 139
SCRA 596)
B. Marine Protection and Indemnity Insurance
90
Sec. 99
89

22

b. Fire91
A contract by which the insurer for a consideration agrees to indemnify the insured against
loss of, or damage to, property by hostile fire, including loss by lightning, windstorm, tornado or
earthquake and other allied risks, when such risks are covered by extension to fire insurance policies
or under separate policies.92
c. Casualty93
Insurance covering loss or liability arising from accident or mishap, excluding those falling
under other types of insurance such as fire or marine.94
d. Suretyship95
An agreement whereby a surety guarantees the performance by the principal or obligor of an
obligation or undertaking in favor of an obligee.96

91

Prerequisites to recovery:
1. Notice of loss must be immediately given, unless delay is waived expressly or impliedly by the insurer
2. Proof of loss according to best evidence obtainable. Delay may also be waived expressly or impliedly by the
insurer
It is very crucial to determine whether a marine vessel is covered by a marine insurance or fire insurance. The
determination is important for 2 reasons:
1. Rules on constructive total loss and abandonment applies only to marine insurance;
2. Rule on co-insurance applies primarily to marine insurance;
3. Rule on co-insurance applies to fire insurance only if expressly agreed upon. (Commercial Law Reviewer,
AguedoAgbayani, 1988 ed.)
92
Sec. 167
93
Classifications:
1. Insurance against specified perils which may affect the person and/or property of the insured. (accident or
health insurance)
Examples: personal accident, robbery/theft insurance
2. Insurance against specified perils which may give rise to liability on the part of the insured for claims for injuries
to or damage to property of others. (third party liability insurance)
Insurable interest is based on the interest of the insured in the safety of persons, and their property, who may
maintain an action against him in case of their injury or destruction, respectively.
Examples: workmens compensation, motor vehicle liability
94
Sec. 174
95
It is essentially a credit accommodation.
It is considered an insurance contract if it is executed by the surety as a vocation, and not incidentally. (Sec. 20)
When the contract is primarily drawn up by 1 party, the benefit of doubt goes to the other party (insured/obligee)
in case of an ambiguity following the rule in contracts of adhesion. Suretyship, especially in fidelity bonding, is thus
treated like non-life insurance in some respects.
Nature of liability of surety:
1. Solidary;
2. Limited to the amount of the bond;
3. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between
the obligor and the obligee. (Sec. 176)
96
Sec. 175

23

e. Life
Insurance on human lives and insurance appertaining thereto or connected therewith which
includes every contract or pledge for the payment of endowments or annuities.
f. Compulsory Motor Vehicle Liability Insurance97
A species of compulsory insurance that provides for protection coverage that will answer for
legal liability for losses and damages for bodily injuries or property damage that may be sustained by
another arising from the use and operation of motor vehicle by its owner.
5. Insurable Interest
It means that the insured possess an interest of some kind susceptible of pecuniary
estimation.
A person has an insurable interest in the subject matter if he is so connected, so situated, so
circumstanced, so related, that by the preservation of the same he shall derive pecuniary benefit, and
by its destruction he shall suffer pecuniary loss, damage or prejudice.
a. In Life/Health98
Every person has an insurable interest in the life and health:
1. of himself, of his spouse and of his children;
2. of any person on whom he depends wholly or in part for education or support;
3. of any person under a legal obligation to him to pay money or respecting property or
services, of which death or illness might delay or prevent performance; and
4. of any person upon whose life any estate or interest vested in him depends.
When it should exist: When the insurance takes effect; not thereafter or when the loss
occurs.

b. In Property
97

Purpose: To give immediate financial assistance to victims of motor vehicle accidents and/or their dependents,
especially if they are poor regardless of the financial capability of motor vehicle owners or operators responsible
for the accident sustained (Shafer v. Judge, RTC, 167 SCRA 386).
Claimants/victims may be a passenger or a 3rd party
It applies to all vehicles whether public and private vehicles.
It is the only compulsory insurance coverage under the Insurance Code.
98
General rule: There is no limit in the amount the insured can insure his life.
Exception: In a creditor-debtor relationship where the creditor insures the life of his debtor, the limit of
insurable interest is equal to the amount of the debt.
If at the time of the death of the debtor the whole debt has already been paid, the creditor can no longer
recover on the policy because the principle of indemnity applies.

24

Every interest in property whether real or personal, or any relation thereto, or liability in
respect thereof, of such nature that the contemplated peril might directly damnify the insured, which
may consist in:
1. an existing interest;
2. any inchoate interest founded on an existing interest; or
3. an expectancy coupled with an existing interest in that out of which the expectancy
arises.
The measure of insurable interest in property is the extent to which the insured might be
damnified by loss or injury thereof.
When insurable interest should exist:
It must exist at the time the policy is taken and at the time the loss incurred but it need not
exist in the meantime
c. Double Insurance99 and Over Insurance100
Double insurance exists where same person is insured by several insurers separately in
respect to same subject and interest.101
99

Requisites:
1. Person insured is the same;
2. Two or more insurers insuring separately;
3. Subject matter is the same;
4. Interest insured is also the same;
5. Risk or peril insured against is likewise the same.
Effects: Where double insurance is allowed, but over insurance results: (Sec. 94)
1. The insured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may select, up
to the amount for which the insurers are severally liable under their respective contracts;
2. Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation for
any sum received by him under any other policy without regard to the actual value of the subject matter insured;
3. Where the policy under which the insured claims is an unvalued policy he must give credit, as against the full insurable value,
for any sum received by him under any policy;
4. Where the insured receives any sum in excess of the valuation in the case of valued policies, or of the insurable value in the
case of unvalued policies, he must hold such sum in trust for the insurers, according to their right of contribution among
themselves;
5. Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in proportion to the
amount for which he is liable under his contract.
Additional or Other Insurance Clause
A condition in the policy requiring the insured to inform the insurer of any other insurance coverage of the property insured.
It is lawful and specifically allowed under Sec. 75 which provides that (a) policy may declare that a violation of a specified
provision thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid it.
A stipulation against double insurance.
Purposes:
1. To prevent an increase in the moral hazard
2. To prevent over-insurance and fraud.
To constitute a violation of the clause, there should have been double insurance.
100
Effect in case of loss:
1. The insurer is bound only to pay to the extent of the real value of the property lost;

2. The insured is entitled to recover the amount of premium corresponding to the excess in value of the
property;
101
Sec. 93

25

Over-insurance results when the insured insures the same property for an amount greater
than the value of the property with the same insurance company.
d. Multiple or Several Interests on Same Property
Several persons have insurable interests on same property. Unless each of them is named as
insured in the property insurance, there would be no coverage for those not named. While they did
have an insurable interest in the property, their interests were not identified.
6. Perfection of the Contract of Insurance102
An insurance contract is a consensual contract and is therefore perfected the moment there
is a meeting of minds with respect to the object and the cause or consideration.
a. Offer and Acceptance/Consensual
Applicant usually makes the offer to the insurer.
Submission of application, even w/ payment is a mere offer on the part of the applicant, it
does not bind the insurer.
Approval of the application by the insurer is necessary to perfect contract. If made:
- w/ payment of premium policy becomes effective
- w/o payment effective upon payment of premium
(1) Delay in acceptance
Tort Theory
Situation where applicant submits application for insurance, but due to negligence of
company, w/c takes an unreasonably long time before processing the application, the applicant dies
before the application is processed, thus, the contract is not perfected.103
(2) Delivery of Policy
Delivery the act of putting the insurance policy the physical document into the
possession of the insured.104
102

What is being followed in insurance contracts is what is known as the cognition theory. Thus, an acceptance
made by letter shall not bind the person making the offer except from the time it came to his knowledge.
(Enriquez vs. Sun Life Assurance Co. of Canada, 41 Phil. 269)
103
Remedy: Insurer liable for damages (Tort Theory) in the amount of the face value of the policy, w/c is given to
the estate of the deceased applicant. (not to beneficiary because contract not perfected. Also, no contractual
liability also bec. no contact)
104
Effects of Delivery:

26

Actual delivery of the policy is not essential unless the parties have so agreed in clear
language. Constructive delivery may be sufficient.105
b. Premium Payment106
peril.

Consideration paid an insurer for undertaking to indemnify the insured against a specified
c. Non-Default Options in Life Insurance
a. Cash Surrender Value

The amount the insured, in case of default, after the payment of at least three (3)full annual
premiums, is entitled to receive if he surrenders the policy and releases his claims upon it. It is the
portion of reserve on a life policy.
Nature of CSV:

1) Where delivery is conditional Non-performance of Condition precedent prevents contract from taking
effect
2) Where delivery is unconditional Delivery corresponding terms of application consummates the contract
and policy delivered becomes final contract bet the parties
3) Where premium still unpaid after unconditional delivery Policy will lapse if premium unpaid at time and
manner specified in the policy, in the absence of any clear agreement that insurer will extend credit.
Individual life insurance contracts usually stipulate that:
1) Premium be paid and
2) Policy be delivered to the insured while he is alive and in good health. Concurrence of both is necessary. (see
Perez v CA case)
105
Vda. De Sindayen case
Whether or not policy was delivered after its issuance depends not upon manual possession by the insured but
rather upon the intention of the parties as manifested in their acts or agreements.
Whether or not delivery to agent is delivery to insured is a question over w/c there has been many conflicting
opinions.
106
Basis of the right of the insurer to collect premiums: Assumption of risk.
General rule: No policy issued by an insurance company is valid and binding until actual payment of premium.
Any agreement to the contrary is void. (Sec. 77)
Exceptions:
1. In case of life or industrial life insurance, when the grace periods applies; (Sec. 77)
2. When the insurer makes a written acknowledgment of the receipt premium; (Sec. 78)
3. Section 77 may not apply if the parties have agreed to the payment of the premium in installments and
partial payment has been made at the time of the loss. (Makati Tuscany Condominium Corp. v. CA, 215 SCRA 462)
4. Where a credit term has been agreed upon. (UCPB vs. MasaganaTelemart, 308 SCRA 259)
5. Where the parties are barred by estoppel. (id., 356 SCRA 307)
Section 77 merely precludes the parties from stipulating that the policy is valid even if the premiums are not
paid. (Makati Tuscany Condominium Corp. v. CA, 215 SCRA 462)
Effect of Acknowledgment of Receipt of Premium in Policy: Conclusive evidence of its payment, so far as to
make the policy binding, notwithstanding any stipulation therein that it shall not be binding until the premium is
actually paid. (Sec. 78)

27

Premium is uniform throughout lifetime of policy, so during the earlier years of the policy,
the premium charges will be more than the actual cost of the protection against the risk in order to
meet the higher cost of risk during the latter years of the policy when the insured is older.107
The more premiums he has paid, the greater will be the CSV but the value is always a lesser
sum than the total amt. of premiums paid.
CSV is the amount company holds in trust for insured deliverable upon demand. So long as
the policy remains in force, the company has practically no beneficial interest in it except as its
custodian; this is the practical, though not the legal, relation of the company to this fund.108
b. Extended Insurance
Depends on availability of CSV.109
Either stated or equal to the amount of the cash surrender value, taken as a single premium,
will purchase; the insured is given the right, upon default, after the payment of at least three full
annual premiums to have the policy continued in force from the date of default for a time either
stated or equal to the amount as the net value of the policy taken as a single premium, will purchase
Also called term insurance, temporary insurance or paid-up extended insurance
c. Paid-up Insurance
Amount of Insurance that the CSV, applied as a single premium, can purchase.110
Better option if insured is still young and in good health because unlike extended insurance,
he may later reinstate policy if he wishes.
d. Automatic Premium Loan
Upon default, insurer lends/advances to the insured without any need of application on his
part, amount necessary to pay overdue premium, but not to exceed the CSV of the policy.
Only applies if requested in writing by the insured either in the application or at any time
before the expiration of the grace period.111
107

Reserve Value - Surrender Charge = Cash Surrender Value

Effect: Surrender policy; terminates the contract of insurance
109
Effect: Policy continues in force from date of default, for a period
During extended period: If insured dies, beneficiary can recover face amount of policy. Insured can also
reinstate the policy w/in this period.
Beyond extended period: If he survives No benefits. He cannot even reinstate the policy by paying past
premiums; has to purchase new policy
Better option if insured not in good health or geriatric
110
Effect: Policy continues in force from date of default for the whole period and under the same conditions of the
original contract w/o further payment of premiums. However, in case of death of insured, he may recover only the
paid-up value of the policy w/c is much less than the original amount agreed upon. (In other words, na-reduce
yung original insurance contract to one with a lower value)
108

28

If there is still CSV, auto premium loan continues until it is exhausted.

Advantageous to the insured because ithelps to continue the contract and allits features in
full force and effect.
Insured under no legal obligation to repay loan
d. Reinstatement of a Lapsed Policy of Life Insurance112
Does not create a new contract, merely revives the old policy. Thus, insurer cannot require
higher premium than amount stipulated in the contract.
Required by Insurance Code for every individual and industrial life policy.
Not required that three (3) annual premiums have been paid.
Application for reinstatement must be filed during the insureds lifetime.
e. Refund of Premiums113
A person insured is entitled to a return of premium, as follows:
1) To the whole premium if no part of his interest in the thing insured be exposed to any of
the perils insured against;
2) Where the insurance is made for a definite period and the insured surrenders his policy,
before termination thereof (such portion as corresponds w/ unexpired time, as a pro rata rate,
returned).114

111

Effect: Insurance continues in force for period covered by the payment. After period, if insured still does not
resume paying his premiums, policy lapses, unless there remains CSV.
112
Sec. 227 (j)
Requisites:
a) Exercised w/in 3 years from default
b) Insured must present evidence of insurability satisfactory to the company
c) Pay all back premiums and all his indebtedness to the insurance company
d) CSV has not been duly paid nor the extension period expired
Insurability does not mean that insured is in good health. Other factors affect insurability like nature of work,
age, etc.
113
There is no right to recovery of premiums in life insurancebecause it is not a divisible contract. It is not an
insurance forany single year, w/ a privilege of renewal from year to year bypaying the annual premium. It is an
entire contract of insurancefor life subject to discontinuance and forfeiture for nonpayment of any of the stipulated premiums.
114
Sec 79
Exceptions:
a) Short period rate agreed upon and appears on face of policy (exception to pro rata rate).
b) Life insurance (exception to applicability of this section).
c) When the contract is voidable because of fraud or misrepresentations of the insurer or his agent (Sec. 81)
d) When the contract is voidable because of the existence of facts of w/c the insurer was ignorant w/o his fault
(ibid.);

29

7. Rescission of Insurance Contracts

a. Concealment115
A neglect to communicate that which a party knows and ought to communicate.116
There is concealment where the insured has knowledge of facts material to the risk, and
good faith and fair dealing requires him to reveal them, and he fails to do so.117

e) When the insurer never incurred any liability under the policy because of default of the insured other than
actual fraud (ibid.);
f) When there is over insurance (Sec. 82);
g) When rescission is granted due to the insurers breach of contract
115
Requisites:
a. A party knows a fact which he neglects to communicate or disclose to the other.
b. Such party concealing is duty bound to disclose such fact to the other.
c. Such party concealing makes no warranty as to the fact concealed.
d. The other party has not the means of ascertaining the fact concealed.
e. Material
Effects: Entitles insurer to rescind, even if the death or loss is due to a cause not related to the concealed matter
(Sec. 27).
Good Faith is not a defense in concealment. Sec. 27 clearly provides that, the concealment whether intentional
or unintentional entitles the injured party to rescind the contract of insurance.
Test of Materiality: Determined not by the event, but solely by the probable and reasonable influence of the
facts upon the party to whom the communication is due, in forming his estimate of the advantages of the
proposed contract, or in making his inquiries (Sec. 31).
Exception to Sec. 31:
a. Incontestability clause
b. Matters under Sec.110 (marine insurance)
The waiver of medical examination in a non-medical insurance contract renders even more material the
information required of the applicant concerning the previous conditions of health and diseases suffered. (Sunlife
v. Sps. Bacani, 246 SCRA 268).
The right to information of material facts may be waived, either by the terms of the insurance or by neglect to
make inquiries as to such facts where they are distinctly implied in other facts of which information is
communicated. (Sec.33)
Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive
will not avoid the policy even though they are untrue. Reason: The insurer cannot rely on those statements. He
must make further inquiry. (Philamcare Health Systems vs. CA, G.R. No. 125678, March 18, 2002).
116
Sec. 26
117
Villanueva, Phil Commercial Law, 1998 Ed., p. 177

30

b. Misrepresentation/Omissions118
Factual statements made by the insured at the time of, or prior to, the issuance of the policy
to give information to the insurer and induce him to enter into the insurance contract. They are
considered an active form of concealment.
c. Breach of Warranties
General rule:
Violation of material warranty or of a material provision of a policy will entitle the other
party to rescind the contract. (Sec. 74)
Exceptions:
a) Loss occurs before the time of performance of the warranty.
b) The performance becomes unlawful at the place of the contract.
c) Performance becomes impossible.119
Immaterial120
General rule: It will not avoid the policy.
it.121

Exception: When the policy expressly provides or declares that a violation thereof will avoid

118

Requisites of a false representation (misrepresentation):

a. The insured stated a fact which is untrue.
b. Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively
as true without knowing it to be true and which has a tendency to mislead.
c. Such fact in either case is material to the risk.
Characteristics:
a. It is not a part of the contract but merely a collateral inducement to it.
b. It may be oral or written.
c. It is made at the same time of issuing the policy or before but not after.
d. It may be altered or withdrawn before the insurance is effected but not afterwards.
e. It always refers to the date the contract goes into effect.
Kinds:
a. Affirmative affirmation of a fact when the contract begins; and
b. Promissory promise to be performed after policy was issued.
Effect of Misrepresentation: the injured party is entitled to rescind from the time when the representation
becomes false.
119
Sec. 73
120
ex. Other insurance clause
121
Sec. 75

31

8. Claims Settlement and Subrogation

a. Notice and Proof of Loss
Notice of Loss the formal notice given the insurer by the insured or claimant under a
policy of the occurrence of the loss insured against.
The purpose is to apprise the insurance company so that it may make proper investigation
and take such action as maybe necessary to protect its interest.
It is necessary as the insurer cannot be liable to pay a claim unless he receives notice of that

122

claim.

Proof of Loss is the formal evidence given the insurance company by the insured or
claimant under a policy of the occurrence of the loss, the particulars and the data necessary to enable
the company to determine its liability and the amount. Is not tantamount to proof or evidence under
the law on evidence.123
Other provisions:
When a preliminary proof of loss is required by a policy, the insured is not bound to give
such proof as would be necessary in a court of justice; but it is sufficient for him to give the best
evidence which he has in his power at the time.124
All defects in a notice of loss, or in preliminary proof thereof, which the insured might
remedy, and which the insurer omits to specify to him, without unnecessary delay, as grounds of
objection, are waived.125

122

Under Sec. 88, insurer is exonerated if notice of loss is not given to the insurer by the insured or by the person
entitled to the benefit without unnecessary delay.
It has been held however that formal notice of loss is not necessary if insurer has actual notice of loss already.
123
Proof of loss is distinct from notice of loss and intended to:
1. give the insurer information by which he may determine the extent of his liability
2. afford him a means of detecting any fraud that may have been practiced upon him.
The law does not stipulate any requirement as to the form in which notice or proof of loss must be given.
However, according to De Leon, it is advisable to give the notice in writing for the protection of the insured or his
beneficiary. Notice may be an informal or provisional claim containing a minimum of information as distinguished
from a formal claim which contains full details of the loss, computations of the amounts claimed, and supporting
evidence, together with a demand or request for payment
Nature of notice and proof of loss
Although they are in the form of conditions precedent, they are in the nature of conditions subsequent the
breach of which affects a right that has already accrued (before the loss, insurers liability is contingent but with
the happening of the loss, his liability becomes properly fixed).
These conditions are intended merely for evidentiary purposes and do not form any part of the conditions of
liability and are construed with much less strictness than those conditions that operate prior to loss.
124
Sec. 89
125
Sec. 90

32

Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any
act of him, or if he omits to take objection promptly and specifically upon that ground.126
If the policy requires, by way of preliminary proof of loss, the certificate or testimony of a
person other than the insured, it is sufficient for the insured to use reasonable diligence to procure
it, and in case of the refusal of such person to give it, then to furnish reasonable evidence to the
insurer that such refusal was not induced by any just grounds of disbelief in the facts necessary to be
certified or testified.127
b. Guidelines on Claims Settlement
(1) Unfair Claims Settlement; Sanctions
Unfair claim settlement practices:
a) knowingly misrepresenting to claimants pertinent facts or policy provisions relating to
coverage at issue;
b) failing to acknowledge with reasonable promptness pertinent communications with
respect to claims arising under its policies;
c) failing to adopt and implement reasonable standards for the prompt investigation of
claims arising under its policies;
d) not attempting in good faith to effectuate prompt, fair and equitable settlement of claims
submitted in which liability has become reasonably clear; or
e) compelling policyholders to institute suits to recover amounts due under its policies by
offering without justifiable reason substantially less than the amounts ultimately recovered in suits
brought by them.
Sanction:
Considered sufficient cause for the suspension or revocation of the company's certificate of
authority.128
(2) Prescription of Action
All criminal actions for the violation of any of the provisions of this Code shall prescribe
after three (3) years from the discovery of such violation. Such actions shall in any event prescribe
after ten years from the commission of such violation.129

126

Sec. 91
Sec. 92
128
See Sec. 241 (1) & (3)
129
Sec. 420
127

33

(3) Subrogation130
It is a process of legal substitution where the insurer steps into the shoes of the insured and
he avails of the latters rights against the wrongdoer at the time of loss.131
F. Transportation Law132
1. Common Carriers
Persons, corporations, firms or associations engaged in the business of carrying or
transporting passengers or goods or both, by land, water, or air, for compensation, offering their
services to the public.133
a. Diligence Required of Common Carriers
Common carriers are bound to observe extraordinary diligence in the vigilance over the
goods and for the safety of the passengers transported by them, according to all the circumstances
of each case.134

130

There can be no subrogation in cases:

a. Where the insured by his own act releases the wrongdoer or third party liable for the loss or damage;
b. Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith
settled the insureds claim for loss;
c. Where the insurer pays the insured for a loss or risk not covered by the policy. (Pan Malayan Insurance
Company v. CA, 184 SCRA 54)
d. In life insurance
e. For recovery of loss in excess of insurance coverage
131
The principle of subrogation is a normal incident of indemnity insurance as a legal effect of payment; it inures to
the insurer without any formal assignment or any express stipulation to that effect in the policy. Said right is not
dependent upon nor does it grow out of any private contract. Payment to the insured makes the insurer a
subrogee in equity. (Malayan Insurance Co., Inc. v. CA, 165 SCRA 536; see also Art. 2207, NCC)
132
The articles mentioned are under the Civil Code
133
Art. 1732
The said article avoids any distinction between one whose principal business activity is the carrying of persons or
goods or both and one who does such carrying only as an ancillary activity (sideline). It also avoids a distinction
between a person or enterprise offering transportation service on a regular or scheduled basis and one offering
such service on an occasional, episodic or unscheduled basis.
Neither does the law distinguish between a carrier offering its services to the general public that is the general
community or population and one who offers services or solicits business only from a narrow segment of the
general population.
A person or entity is a common carrier even if he did not secure a Certificate of Public Convenience (De Guzman
vs. CA, 168 SCRA 612).
It makes no distinction as to the means of transporting, as long as it is by land, water or air. It does not provide
that the transportation should be by motor vehicle. (First Philippine Industrial Corporation vs. CA)
One is a common carrier even if he has no fixed and publicly known route, maintains no terminals, and issues no
tickets (Asia Lighterage Shipping, Inc. vs. CA).
134
Art. 1733
The law requires CC to exercise extra-ordinary diligence which means that they must render service with the
greatest skill and utmost foresight.The extra-ordinary diligence required of carriers in thehandling of the goods of

34

b. Liabilities of Common Carriers

Common carriers are liable for the death of or injuries to passengers through the negligence
or willful acts of the carriers employees, although such employees may have acted beyond the scope
of their authority or in violation of the orders of the common carriers. The liability does not cease
even upon proof that they exercised diligence in the selection and supervision of their employees.135
Carrier is responsible for injuries suffered by a passenger on account of the willful acts or
negligence of other passengers or of strangers, if the common carriers employees through the
exercise of the diligence of a good father of a family could have prevented or stopped the act or
omission.136
2. Vigilance over goods
a. Exempting Causes
(1) Requirement of Absence of Negligence

the shippers and consigneeslast from the time the cargoes are loaded in thevessels until they are discharged and
delivered to theconsignees.
Rendition of service with the greatest skill and utmost foresight (Davao Stevedore Co. v. Fernandez)
Coverage:
1. Vigilance over goods (Arts. 1734-1754); and
2. Safety of passengers (Arts. 1755-1763).
Passenger:
A person who has entered into a contract of carriage, express or implied, with the carrier. They are entitled to
extraordinary diligence from the common carrier.
The following are not considered passengers, and are entitled to ordinary diligence only:
a. One who has not yet boarded any part of a vehicle regardless of whether or not he has purchased a ticket;
b. One who remains on a carrier for an unreasonable length of time after he has been afforded every safe
opportunity to alight;
c. One who has boarded by fraud, stealth, or deceit;
d. One who attempts to board a moving vehicle, although he has a ticket, unless the attempt be with the
knowledge and consent of the carrier;
e. One who has boarded a wrong vehicle, has been properly informed of such fact, and on alighting, is injured by
the carrier;
f. Invited guests and accommodation passengers. (Lara vs. Valencia)
g. One who rides any part of the vehicle which is unsuitable or dangerous or which he knows is not designed or
intended for passengers.
135
Art. 1759
136
Art. 1763
A common carrier is responsible for injuries suffered by a passenger on account of the lawful acts/negligence of
other passengers or of strangers provided that the employees could have prevented the act or omission through
the exercise of a good father of a family.
Common Carrier is liable for damages for defects of its equipment.
Common Carrier is liable for the misconduct of its employees done in their own interest.
Carrier is liable when it issues to passenger a confirmed ticket for a particular ticket if he is not put in that flight.
Carrier liable only for damages that are natural and probable consequence and breach of contract which includes
medical, hospital and other expenses.

35

The extra-ordinarydiligencerequired of common carriers in the handling ofthe goods of

theshipper and the consignees lasts from the time thecargoes are loaded in the vessels until they
aredischarged and delivered to the consignees. To comply with this obligation, the common carrier
should be afforded a wide discretion in the selection and supervision of persons who will handle
the goods.
(2) Absence of Delay
The common carrier must not be in delay. Ifthecommon carrier incurs in delay, a natural
disaster shall not free it from responsibility.137
(3) Due diligence to prevent or lessen the loss
The common carrier must exercise due diligence to prevent or minimize the loss before,
during and after the occurrence of flood, storm,or other natural disaster in order that the common
carrier may be exempted from liability for the loss,destruction, or deterioration of the goods.
b. Contributory negligence
If the shipper or owner merely contributed to the loss, destruction or deterioration of the
goods, the proximate cause thereof being the negligence of the common carrier, the latter shall be
liable in damages, which however, shall be equitably reduced.138
c. Duration of liability
(1) Delivery of goods to common carrier
From the time the goods are unconditionally placed in the possession of, and received by the
carrier for transportation until the same are delivered, actually or constructively, by the carrier to the
consignee or to the person who has the right to receive them.139
(2) Actual or constructive delivery
(3) Temporary unloading or storage
It remains in full force and effect even when they are temporarily unloaded or stored in
transit unless the shipper or owner has made use of the right of stoppage in transitu.140
It continues to be operative even during the time the goods are stored in a warehouse of the
carrier at the place of destination until the consignee has been advised of the arrival of the goods
137

Art. 1740
Under Art. 1165, par. 3, if the obligor incurs delay, he shall be responsible for any fortuitous event until he has
effected delivery.
138
Art. 1741
139
Art. 1736
140
Art. 1737

36

and has had reasonable opportunity thereafter to remove them or otherwise dispose of them.141
d. Stipulation for limitation of liability
(1) Void stipulations
a) The goods are transported at the risk of the owner or shipper;
b) The carrier will not be liable for any loss, destruction or deterioration of the goods;
c) The carrier need not observe any diligence in the custody of the goods;
d) The carrier shall exercise a degree of diligence less than that of a good father of a family
over the movable transported;
e) Thecarrier shall not be responsible for the acts or omissions of his or its employees;
f) The carriers liability for acts committed by thieves or robbers who do not act with grave
or irresistible threat, violence or force is dispensed with or diminished;
g) The carrier is not responsible for the loss, destruction or deterioration of the goods on
account of the defective condition of the car, vehicle, ship or other equipment used in the contract
of carriage.142
(2) Limitation of liability to fixed amount
A contract fixing the sum that may be recovered, by the owner or shipper for the loss,
destruction, or deterioration of the goods is valid, if it is reasonable and just under the
circumstances, and has been fairly and freely agreed upon.143
(3) Limitation of liability in absence of declaration of greater value
A stipulation that the common carrier's liability is limited to the value of the goods appearing
in the bill of lading, unless the shipper or owner declares a greater value, is binding.144
e. Liability for baggage of passengers
(1) Checked-in baggage
The carrier who has in his custody the baggage of a passenger to be carried, like any other
goods, is required to observe extraordinary diligence. In case of loss or damage, the carrier is
presumed negligent.145
141

Art. 1738
Art. 1745
143
Art. 1750
144
Art. 1749
145
Under Arts. 1733 to 1753, Civil Code
142

37

(2) Baggage in possession of passengers

The baggage in transit will be considered as necessary deposit. The common carrier shall be
responsible for the baggage as depositaries, provided that notice was given to them or its employees.
And the passenger took the necessary precaution, which the carrier has advised them relative to the
care and vigilance of their baggage. In case of loss due to fault of the passenger, the carrier will not
be liable.146
3. Safety of Passengers
a. Void stipulations
Dispensing with or lessening the extraordinary responsibility of a common carrier for the
safety of passengers imposed by law by stipulation, by posting of notices, by statements on tickets or
otherwise.147
b. Duration of liability
(1) Waiting for carrier or Boarding of carrier
It is the duty of common carriers of passengers to stop their conveyances a reasonable
length of time in order to afford passengers an opportunity to enter, and they are liable for injuries
suffered from the sudden starting up or jerking of their conveyances while doing so. The duty
which the carrier of passengers owes to its patrons extends to persons boarding the cars as well as to
those alighting therefrom.148
(2) Arrival at destination
The duty of a common carrier to provide safety to its passengers so obligates it not only
during the course of the trip, but for so long as the passengers are within its premises and where
they ought to be in pursuance to the contract of carriage.149
c. Liability for acts of others
(1) Employees
Tort; however, the employee must be on duty at the time of the act.150
146

The act of the thief or robber, who has entered the common carriers vehicle is not deemed force majeure,
unless it is done with the use of arms or through an irresistible force (Art. 1754, id.)
147
Art. 1757
148
Dangwa Trans Co., Inc. vs. CA, 202 SCRA 574
149
LRTA v. Navidad, [2003]
All persons who remain on the premises within a reasonable time after leaving the conveyance are to be deemed
passengers, and what is a reasonable time or a reasonable delay within this rule is to be determined from all the
circumstances, and includes a reasonable time to see after his baggage and prepare for his departure. (La Mallorca
v. CA, 17 SCRA 739 ; Abiotiz Shipping Corporation v. CA, 179 SCRA 95)
150
Maranan v. Perez

38

(2) Other passengers and strangers

Not absolute; limited by Art. 1763.151
d. Extent of liability for damages
Common carriers are liable for the death of or injuries to passengers through the negligence
or willful acts of the former's employees, although such employees may have acted beyond the scope
of their authority or in violation of the orders of the common carriers.
This liability of the common carriers does not cease upon proof that they exercised all the diligence
of a good father of a family in the selection and supervision of their employees.152
The common carrier's responsibility prescribed in the preceding article cannot be eliminated
or limited by stipulation, by the posting of notices, by statements on the tickets or otherwise.153
A common carrier is responsible for injuries suffered by a passenger on account of the
willful acts or negligence of other passengers or of strangers, if the common carrier's employees
through the exercise of the diligence of a good father of a family could have prevented or stopped
the act or omission.154
4. Bill of Lading
The written acknowledgment of receipt of goods and agreement to transport them to a
specific place to a person named or to his order.
a. Three-fold character
1. It is a receipt for the goods shipped
2. It is a contract by which the three parties, namely, the shipper, carrier and consignee
undertake specific responsibilities and assume stipulated obligations; and
3. It is a legal evidence of the contract between the shipper and the carrier. As evidence, its
contents shall decide all disputes which may arise with regard to their execution and fulfillment.155
b. Delivery of goods
(1) Period for delivery
Stipulated in Contract/Bill of Lading:

151

rd

See d), 3 par., below

Art. 1759
153
Art. 1760
154
Art. 1763
155
In the absence of a bill of lading, their respective claims may be determined by legal proofs which each of the
contracting parties may present in conformity with law.
152

39

Carrier is bound to fulfill the contract and is liable for any delay; no matter from what cause
it may have arisen.
No stipulation:
1. Within a reasonable time.
2. Carrier is bound to forward them in the 1st shipment of the same or similar goods which
he may make to the point of delivery.156
(2) Delivery without surrender of bill of lading
In case the consignee, upon receiving the goods, cannot return the bill of lading subscribed
by the carrier, because of its loss or of any other cause, he must give the latter a receipt for the
goods delivered, this receipt producing the same effects as the return of the bill of lading.157
(3) Refusal of consignee to take delivery
Instances when the carrier may validly refuse to accept the goods include the ff:
1) Goods sought to be transported are dangerous objects, or substances including dynamite
and other explosives
2) Goods are unfit for transportation
3) Acceptance would result in overloading
4) Contrabands or illegal goods
5) Goods are injurious to health
6) Goods will be exposed to untoward danger like flood, capture by enemies and the like
7) Goods like livestock will be exposed to disease
8) Strike
9) Failure to tender goods on time.158
In case of carriage by railway, the carrier is exempted from liability if carriage is insisted upon
by the shipper, provided its objections are stated in the bill of lading.
However, when a common carrier accepts cargo for shipment for valuable consideration, it
takes the risk of delivering it in good condition as when it was loaded.159
d. Period for filing claims160
a. Patent damage: shipper must file a claim against the carrier immediately upon delivery161

156

Art. 358, Code of Commerce

rd
Art. 353, 3 .par., Code of Commerce
158
Notes and Cases on the Law on Transportation and Public Utilities, Aquino, T.& Hernando, R.P. 2004 ed. p.68
159
PAL vs. CA
160
These rules does not apply to misdelivery of goods. (Roldan vs. Lim Ponzo)
161
it may be oral or written
The filing of notice of claim is a condition precedent for recovery.
157

40

b. Latent damage: shipper should file a claim against the carrier within 24 hours from
delivery.
e. Period for filing actions
Not provided by Article 366. Thus, in such absence, Civil Code rules on prescription apply.
If despite the notice of claim, the carrier refuses to pay, action must be filed in court.
1. No bill of lading was issued: within 6 years
2. Bill of lading was issued: within 10 years.
5. Maritime Commerce162
a. Charter Parties163
(1) Bareboat/Demise Charter
The charterer provides crew, food and fuel. The charterer is liable as if he were the owner,
except when the cause arises from the unworthiness of the vessel. The shipowner leases to the
charterer the whole vessel, transferring to the latter the entire command, possession and consequent
control over the vessels navigation, including the master and the crew, who thereby become the
charters servants. It transforms a common carrier into a private carrier.164

Purpose of notice: To inform the carrier that the shipment has been damaged, and it is charged with liability
therefore, and to give it an opportunity to make an investigation and fix responsibility while the matter is fresh.
Shorter period may be stipulated by the parties because it merely affects the shippers remedy and does not
affect the liability of the carrier. (PHILAMGEN vs. Sweetlines, Inc.)
162
Articles mentioned are under the Code of Commerce
Maritime/admiralty law
It is the system of laws which particularly relates to the affairs and business of the sea, to ships, their crews and
navigation, and to maritime conveyance of persons and property. (Notes and Cases on the Law on Transportation
and Public Utilities, Aquino & Hernando, citing Francisco, p.254)
Maritime laws apply only to maritime trade and sea voyages. (Pandect of Commercial Law and Jurisprudence,
Justice Jose Vitug, 1997 ed.)
Arrastre service is not maritime in character. It refers to a contract for the unloading of goods from a vessel. (ICTSI
vs. Prudential Guarantee, 320 SCRA 244)
163
Charter party
A contract by virtue of which the owner or agent binds himself to transport merchandise or persons for a fixed
price.
A contract by which an entire ship, or some principal part thereof is let/leased by the owner to another person for
a specified time or use. (Planters Products, Inc. vs. CA, 226 SCRA 476)
Parties:
1. Ship owner or ship agent
2. Charterer
164
The charterer becomes the owner of the vessel pro hac vice, just for that one particular purpose only. Because
the charterer is treated as owner pro hac vice, the charterer assumes the customary rights and liabilities of the
shipowner to third persons and is held liable for the expense of the voyage and the wages of the seamen.

41

(2) Time Charter165

- Vessel is chartered for a fixed period of time or duration of voyage.
(3) Voyage/Trip Charter166
- The vessel is leased for one or series of voyages usually for purposes of transporting goods
for charterer.
b. Liability of Shipowners and Shipping Agents
Shipowner167
Person who has possession, control and management of the vessel and the consequent right
to direct her navigation and receive freight earned and paid, while his possession continues.
Ship agent168
Person entrusted with provisioning and representing the vessel in the port in which it may
be found; also includes the shipowner.169
(1) Liability for acts of captain
All contracts of the captain, whether authorized or not, to repair, equip and provision the
vessel.170
i.. Damages to vessel and to cargo due to lack of skill and negligence;
ii. Thefts and robberies of the crew;
iii. Losses and fines for violation of laws;
iv. Damages due to mutinies;
v. Damages due to misuse of power;
vi. For deviations;
vii. For arrivals under stress;
vi. Damages due to non-observance of marine regulations.171
(2) Exceptions to limited liability
i. When the shipowner is at fault
ii. Insurance
iii. Liability under the Labor Code
iv. Chattel Mortgage of ship172
165

A kind of contract of Affreightment whereby the owner of the vessel leases part or all of its space to haul goods
for others.
The shipowner retains the possession, command and navigation of the ship, the charterer merely having use of
the space in the vessel in return for his payment of the charter hired.
166
Ibid.
167
proprietario
168
naviero
169
Not a mere agent under civil law; he is solidarily liable with the ship owner.
170
Art. 586
171
Art. 618
172
Villanueva, Phil. Commercial Law, 1998 ed., pp. 28-31

42

c. Accidents and Damages in Maritime Commerce

(1) General Average173
Damages or expenses deliberately caused in order to save the vessel, its cargo or both from
real and known risk.174
(2) Collisions
Impact of two vessels both of which are moving.175
d. Carriage of Goods by Sea Act176
(1) Application
The transportation must be:
1. Water/maritime transportation;
2. for the carriage of goods; and
3. overseas/international/foreign177
It can be applied in domestic sea transportation if agreed upon by the parties.178
(2) Notice of Loss or Damage179
Patent damage: shipper should file a claim with the carrier immediately upon delivery
Latent damage: shipper should file a claim with the carrier within three days from delivery.180

173

Average - an extraordinary or accidental expense incurred during the voyage in order to preserve the cargo,
vessel or both, and all damages or deterioration suffered by the vessel from departure to the port of destination,
and to the cargo from the port of loading to the port of consignment. (Art. 806)
The person whose property has been saved must contribute to reimburse the damage caused or expense
incurred if the situation constitutes general average.
174
Art. 811
Goods not covered by general average even if sacrificed:
1. Goods carried on deck. (Art.855)
2. Goods not recorded in the books or records of the vessel. (Art. 855 (2))
3. Fuel for the vessel if there is more than sufficient fuel for the voyage. (Rule IX, York-Antwerp Rule)
175
Allision- impact between a moving vessel and a stationary one.
176
C.A. No. 65
177
from foreign port to Philippine port
178
Clause paramount or paramount clause
179
Loss or Damage as applied to the COGSA contemplates a situation where no delivery at all was made by the
shipper of the goods because the same had perished, gone out of commerce, or disappeared in such a way that
their existence is unknown or they cannot be recovered. Thus, it is inapplicable in case of misdelivery or
conversion. (Ang vs. American Steamship Agencies Inc.)and damage arising from delay or late delivery (Mitsui
O.S.K. Lines Ltd. vs. CA). In such instance the, Civil Code rules on prescription shall apply.
180
Sec. 3(6)
The filing of a notice of claim is not a condition precedent.

43

(3) Period of Prescription

Action for loss or damage to the cargo should be brought within one (1) year181 after:
a. Delivery of the goods;182 or
b. The date when the goods should have been delivered.183
(4) Limitation of liability
Under Sec. 4(5), the liability limit is set at $500 per package or customary freight unit unless
the nature and value of such goods is declared by the shipper. This is deemed incorporated in the
bill of lading even if not mentioned in it.184
6. The Warsaw Convention185
a. Applicability186
The transportation must be:
1. International transportation;187
181

The one-year prescriptive period is suspended by:

1. The express agreement of the parties (Universal Shipping Lines, Inc. vs. IAC, 188 SCRA 170)
2. The filing of an action in court until it is dismissed. (Stevens & Co. vs. Nordeutscher Lloyd, 6 SCRA 180)
The one-year period shall run from delivery of the last package and is not suspended by extrajudicial demand.
(Dole Phils.,Inc. vs. Maritime Co., 148 SCRA 118)
The one-year period shall run from delivery to the arrastre operator and not to the consignee. (Union Carbide
Phils, Inc. vs. Manila Railroad Co., SCRA 359)
The insurer exercising its right of subrogation is bound by the one-year prescriptive period. However, it does not
apply to the claim against the insurer for the insurance proceeds. (Fil. Merchants Ins. Co. vs. Alejandro; Mayer
Steel Pipe Corp. vs. CA)
182
delivered but damaged goods
183
non-delivery (Sec. 3[6])
184
Eastern Shipping vs. IAC, 150 SCRA 463
185
As much a part of Philippine law as the Civil Code, Code of Commerce and other municipal special laws, and the
provisions therein contained, specifically on the limitation of carriers liability, are in operation in the Philippines
but only in appropriate situation (PAL vs. CA, 255 SCRA 48)
186
When inapplicable:
1. When public policy is contradicted;
2. If the requirements under the Convention are not complied with.
187
any transportation in which the place of departure and the place of destination are situated either:
1. Within the territories of two High Contracting Parties regardless of whether or not there be a break in the
transportation or transshipment, or
2. Within the territory of a single High Contracting Party, if there is an agreed stopping place within a territory
subject to the sovereignty, mandate or authority of another power, even though that power is not a party to the
Convention. (round trip, Am. Jur.)
Transportation to be performed by several successive air carriers shall be deemed to be one undivided
transportation, if it has been regarded by the parties as a single operation, whether it has been agreed upon under
the form of a single contract or of a series of contracts, and it shall not lose its international character merely
because one contract or a series of contracts is to be performed entirely within a territory subject to the
sovereignty, suzerainty, mandate, or authority of the same High Contracting Party. (Art. 1 Sec.3)

44

2. Air transportation;188 and

3. Carriage of passengers, baggage or goods.
The WC shall also apply to fortuitous transportation by aircraft performed by an air
transportation enterprise.
b. Limitation of liability189
(1) Liability to passengers
General rule:Limited to 250,000 francs per passenger
Exception:Agreement to a higher limit
(2) Liability for checked baggage
General rule:limited to 250 francs per kilogram
Exception: In case of special declaration of value and payment of a supplementary sum by
consignor, carrier is liable to not more than the declared sum unless it proves the sum is greater than
actual value.
(3) Liability for hand-carried baggage
Limited to 5,000 francs per passenger.
c. Willful Misconduct
The War Convention denies to the carrier availment of the provisions which exclude or limit
the carriers liability if the damage is caused by his willful misconduct or by such default on his part,
as, in accordance with the law of the court seized of the case, is considered to be equivalent to
willful misconduct, of if the damage is similarly caused by any agent of carrier acting within the
scope of his management.190

188

The period during which the baggage or goods are in the charge of the carrier, whether in an airport or on board
an aircraft, or, in case of a landing outside an airport, in any place whatsoever.
It includes any transportation by land or water outside an airport if such takes place in the performance of a
contract for transportation by air, for the purpose of loading, delivery, or transshipment.
189
Art. 22, as amended by Guatemala Protocol, 1971; Alitalia vs. IAC
190
Under domestic law and jurisprudence, the attendance of gross negligence (given the equivalent of fraud or bad
faith) holds the common carrier liable for all damages which can be reasonable attributed, although unforeseen, to
the non-performance of the obligation, including exemplary damages.

45

G. Corporation Law
1. The Corporation Code191
a. Corporation, defined
An artificial being created by operation of law having the right of succession, and the
powers, attributes and properties expressly authorized by law and incident to its existence.192
b. Classification of corporations
1. As to organizers
a. public by State only; and
b.private by private persons alone or with the State.
2. As to functions
a. public government of a portion of the territory; and
b. private usually for profit-making
3. As to governing law
a. public Special Laws; and
b. private Law on Private Corporations
4. As to legal status
a. De jure corporation organized in accordance with the requirements of law.
b. De facto corporation organized with a colorable compliance with the
requirements of a valid law. Its existence cannot be inquired collaterally. Such inquiry may be
made by the Solicitor General in a quo warranto proceeding.193
c. Corporation by estoppel group of persons that assumes to act as a corporation
knowing it to be without authority to do so, and enters into a transaction with a third person
191

B.P. 68
Sec. 2
193
Sec. 20
Requisites:
1. The existence of a valid law under which it may be incorporated;
2. A bona fide attempt in good faith to incorporate under such law;
3. Actual use or exercise in good faith of corporate powers; and
4. Issuance of a certificate of incorporation by the SEC as a minimum requirement of continued good faith.
The only difference between a de facto corporation and a de jure corporation is that a de jure corporation can
successfully resist a suit by a state brought to challenge its existence; a de facto corporation cannot sustain its right
to exist.
192

46

on the strength of such appearance. It cannot be permitted to deny its existence in an action
under said transaction.194It is neither de jure nor de facto.
d. Corporation by prescription one which has exercised corporate powers for an
indefinite period without interference on the part of the sovereign power.195
5. As to existence of shares of stock:
a. Stock corporation a corporation 1) whose capital stock is divided into shares
and 2) which is authorized to distribute to shareholders dividends or allotments of the
surplus profits on the basis of the shares held.196
b. Non-stock corporation does not issue stocks nor distribute dividends to their
members.
6. As to relationship of management and control
a. Holding Corporation - it is one which controls another as a subsidiary by the
power to elect management. It is one that holds stocks in other companies for purposes of
control rather than for mere investment.
b. Subsidiary Corporation - one which is so related to another corporation that the
majority of its directors can be elected directly or indirectly by such other corporation.197
c. Affiliates - company which is subject to common control of a mother holding
company and operated as part of the system.
d. Parent and Subsidiary Corporation - separate entities with power to contract with
each other. The board of directors of the parent company determines its representatives to
attend and vote in the stockholders meeting of its subsidiary. The stockholders of the parent
company demand representation in the board meetings of its subsidiary.
7. As to place of incorporation
a. Domestic corporation- a corporation formed, organized, or existing under
Philippine laws.
b. Foreign corporation a corporation formed, organized, or existing under any laws
other than those of the Philippines.198

194

Sec. 21
e.g. Roman Catholic Church
196
Sec. 3
197
The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.
195

198

Sec. 123

47

c. Nationality of corporations
(1) Control test
Determined by the nationality of the controlling stockholders or members. This test is
applied in times of war. Also known as the wartime test.
(2) Grandfather rule
Applied in determining the nationality of a corporation. It traces the nationality of the
stockholders of investor corporations so as to ascertain the nationality of the corporation where the
investment is made.199
The application of the test is limited however to resolving issues on investments. By the
Foreign Investments Act, the grandfather rule is merely an ancillary rule to the main method of
determining nationality, wherein corporations that are 60% owned by Filipinos are automatically
considered as 100% Filipino-owned. Only when a corporation is less than
60% owned shall the grandfather rule be applied.
d. Corporate juridical personality
(1) Doctrine of separate juridical personality
A corporation has a juridical personality separate and distinct from that of its stockholders
or members.200
199

Ex: MV Corporation and AC Corporation have equal interest in XYZ Company. MV Corporation is 60%
owned by Filipinos, while AC Corporation is 50% owned by Filipinos. By the grandfather rule, MV Corporation
would have a 30% Filipino interest in XYZ Company (60% of 50%), while AC Corporation would have a 25% Filipino
interest in XYZ Company (50% of 50%). Hence, the total Filipino interest is only 55%.
200
Used for purposes of convenience and to subserve the ends of justice.
Consequences/significance:
1. Liability for acts or contracts obligations incurred by a corporation, acting through its authorized agents are
its sole liabilities. (Creese vs. CA, 93 SCRA 483)
2. Right to bring actions may bring civil and criminal actions in its own name in the same manner as natural
persons. (Art. 46, Civil Code)
3. Right to acquire and possess property property conveyed to or acquired by the corporation is in law the
property of the corporation itself as a distinct legal entity and not that of the stockholders or members. (Art. 44(3),
Civil Code)
4. Acquisition of court of jurisdiction service of summons may be made on the president, general manager,
corporate secretary, treasurer or in-house counsel. (Sec. 11, Rule 14, Rules of Court).
5. Changes in individual membership remains unchanged and unaffected in its identity by changes in its
individual membership. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.)
6. Entitlement to constitutional guaranties:
a. Due process (Albert vs. University Publishing, 13 SCRA 84)
b. Equal protection of the law (Smith, Bell & Co. vs. Natividad, 40 Phil. 136)
c. Protection against unreasonable searches and seizures. (Stonehill vs. Diokno, 20 SCRA 383)

48

(a) Liability for tort and crimes

Liability for torts a corporation is liable whenever a tortuous act is committed by an officer
or agent under the express direction or authority of the stockholders or members acting as a body,
or, generally, from the directors as the governing body.201
Liability for crimes since a corporation is a mere legal fiction, it cannot be held liable for a
crime committed by its officers, since it does not have the essential element of malice; in such case
the responsible officers would be criminally liable.202
(b) Recovery of damages
A corporation is not entitled to moral damages because it has no feelings, no emotions, no
senses.203
In one case,204 though, the Supreme Court recognized that Corporations can be entitled to
moral damages if their financial reputation had been harmed.
The Court held that in all cases of libel, corporations can be awarded moral damages. The
Court, through Justice Antonio Carpio said:
A juridical person is generally not entitled to moral damages because, unlike
a natural person, it cannot experience physical suffering or such sentiments as
wounded feelings, serious anxiety, mental anguish or moral shock. The Court of
Appeals cites Mambulao Lumber Co. v. PNB, et al. to justify the award of moral
damages. However, the Courts statement in Mambulao that a corporation may have
a good reputation which, if besmirched, may also be a ground for the award of moral
damages is an obiter dictum.
Nevertheless, AMECs claim for moral damages falls under item 7 of
Article 2219 of the Civil Code. This provision expressly authorizes the recovery of
moral damages in cases of libel, slander or any other form of defamation. Article
2219(7) does not qualify whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation can validly complain for libel or
any other form of defamation and claim for moral damages.
Moreover, where the broadcast is libelous per se, the law implies
damages. In such a case, evidence of an honest mistake or the want of character or
reputation of the party libeled goes only in mitigation of damages. Neither in such a
case is the plaintiff required to introduce evidence of actual damages as a condition

A corporation is not entitled to invoke the right against self-incrimination. (Bataan Shipyard vs. PCGG)
PNB vs. CA, 83 SCRA 237r
202
People vs. Tan Boon Kong, 54 Phil.607
203
ABS-CBN vs. Court of Appeals
204
Filipinas Broadcasting Network, Inc. v. Ago Medical and Educational Center-Bicol Christian College of Medicine,
January 17, 2005
201

49

precedent to the recovery of some damages. In this case, the broadcasts are libelous
per se. Thus, AMEC is entitled to moral damages.
(2) Doctrine of piercing the corporate veil
It means that while the corporation cannot be generally held liable for acts or liabilities
of its stockholders or members, and vice versa because a corporation has a personality separate
and distinct from its members or stockholders, however, the corporate existence is
disregarded under this doctrine when the corporation is formed or used for illegitimate purposes,
particularly, as a shield to perpetuate fraud, defeat public convenience, justify wrong, evade a just
and valid obligation or defend a crime.
(a) Grounds for application of doctrine205
1. The parent corporation owns all or most of the capital of the subsidiary.
2. The parent and subsidiary corporations have common directors or officers.
3. The parent company finances the subsidiary
4. The parent company subscribed to all the capital stock of the subsidiary or otherwise
causes its incorporation.
5. The subsidiary has grossly inadequate capital.
6. The subsidiary has substantially no business except with the parent corporation or no
assets except those conveyed to or by the
parent corporation.
7. The papers of the parent corporation or in the statements of its officers, the subsidiary
is described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporations own.
8. The parent corporation uses the property of the subsidiary as its own.
9. The directors or executives of the subsidiary do no act independently in the interest of
the subsidiary but take their orders from the parent corporation.
10. The formal legal requirements of the subsidiary are not observed.206
(b) Test in determining applicability

205

Mere ownership by a single stockholder or by another corporation of all or substantially all of the capital stock
of the corporation does not justify the application of the doctrine. There must be other circumstances that
must be present.
206
Phil. National Bank v. Ritratto Group, Inc., 362 SCRA 216 [2001]

50

Control not mere stock control but complete domination not only of finances,
but of policy and business practice in respect to the transaction attacked and must have been such
that the corporate entity as to this transaction had at the time no separate mind, will or existence or
existence of its own.207
e. Capital structure
(1) Number and qualifications of incorporators
1.
2.
3.
4.
5.

natural persons;
not less than 5 but not more than 15;
of legal age;
majority must be residents of the Philippines; and
each must own or subscribe to at least one share.
(2) Minimum capital stock and subscription requirements

i. at least twenty-five percent (25%) of the authorized capital stock as stated in the articles of
incorporation must be subscribed at the time of incorporation;
ii. at least twenty-five (25%) per cent of the total subscription must be paid upon
subscription, the balance to be payable on a date or dates fixed in the contract of subscription
without need of call, or in the absence of a fixed date or dates, upon call for payment by the board
of directors; and
iii. in no case shall the paid-up capital be less than five thousand (P5,000.00) pesos.
(3) Corporate term
a. The term shall not exceed fifty (50) years in any one instance.
b. The amendment is effected before the expiration of corporate term, for after dissolution
by expiration of the corporate term there is no more corporate life to extend.
c. The extension cannot be made earlier than 5 years prior to the expiration date unless there
are justifiable reasons as determined by the SEC.
(3) Classification of shares
1. Common shares
The basic class of stock ordinarily and usually issued without extraordinary rights and
privileges, and the owners thereof are entitled to a pro rata share in the profits of the corporation

207

Such control must have been used by the defendant to commit a fraud or wrong to perpetuate the violation
of a statutory or other positive legal breach of duty, or a dishonest and an unjust act in contravention of the
plaintiffs legal right, and,
The said control and breach of duty must have proximately caused the injury or unjust loss complained of. (PNB
v. Andrada Electric & Engineering Company, 381 SCRA 244 [2002], Child Learning Center Inc. v. Tagario
(November 25, 2005)

51

and in its assets upon dissolution and, likewise, in the management of its affairs without preference
or advantage whatsoever.
2. Preferred shares
Those issued with par value, and preferences either with respect to (a) assets after
dissolution, (b) distribution of dividends, or both, and other preferences.
3. Redeemable shares
Those which permit the issuing corporation to redeem or purchase its own shares.
4. Treasury shares
Shares that have been earlier issued as fully paid and have thereafter been acquired by the
corporation by purchase, donation, and redemption or through some lawful means.

5. Founders' share
Shares issued to organizers and promoters of a corporation in consideration of some
supposed right or property.
6. Voting shares
Shares with a right to vote.
7. Non-voting shares
Shares without right to vote.
8. Escrow stock
Deposited with a third person to be delivered to a stockholder or his assign after complying
with certain conditions, usually payment of full subscription price.
9. Over-issued stock
Stock issued in excess of the authorized capital stock. It is also known as spurious stock. Its
issuance is considered null and void.
10. Watered stock
A stock issued not in exchange for its equivalent either in cash, property, share, stock
dividends, or services.
Water in the stock represents the difference between the fair market value at the time of
the issuance of the stock and the par or issued value of said stock. Both par and no par stocks can
thus be watered stocks.
11. Par value shares
Shares with a value fixed in the certificates of stock and the articles of incorporation.
12. No par value shares
Shares having no par value but have issued value stated in the certificate or articles of
incorporation.
52

13. Street certificate

A stock certificate endorsed by the registered holder in blank and transferee can command
its transfer to his name from the issuing corporation.
14. Convertible share
A share that is changeable by the stockholder from one class to another at a certain price and
within a certain period.
15. Fractional share
A share with a value of less than one full share.
f. Incorporation and organization
(1) Promoter
A person who, acting alone or with others, takes initiative in founding and organizing the
business or enterprise of the issuer and receives consideration therefor.
(a) Liability of promoter
He is liable to contracts entered by him in behalf of proposed corporation.208
(b) Liability of corporation for promoters contracts
Contracts by the promoter for and in behalf of a proposed corporation generally bind only
him, subject to and to the extent of his representations, and not the corporation, unless and until
after these contracts are ratified, expressly or impliedly, by its Board of Directors/Trustees.
Without ratification by a corporation after its due incorporation, a contract entered into in
behalf of a corporation yet to be organized or still in the process of incorporation is void as against
the corporation.209
(2) Subscription contract
Any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed.210
The subscribed shares need not be paid in full in order that the subscription may be valid.
The subscription contract is a consensual contract that is perfected upon the meeting of the minds
of the parties. The name of the subscriber is recorded in the stock and transfer book, and from that
time, such subscriber becomes a stockholder of record entitled to all the rights of a stockholder.
Until the stocks are fully paid, it continues to be a subsisting liability that is legally enforceable.
208

A promoter is an agent of the incorporators but not of the corporation.

Cagayan Fishing Dev. Co., Inc. v. TeodoroSandiko, 65 Phil. 223[1937]
210
Sec. 60
A person agreed to take and pay for original and unissuedshares of a corp. formed or to be formed
209

53

(3) Pre-incorporation subscription agreements211

Subscription of shares of stock of a corporation still to be formed.
Shall be irrevocable for a period of at least 6 months from date of subscription, unless:
1. All of the other subscribers consent to the revocation;
2. The incorporation of said corporation fails to materialize with said period or within a
longer period as may be stipulated in the contract of subscription; provided that no preincorporation subscription may be revoked after the submission of the articles of incorporation to
the SEC.212
(4) Consideration for stocks
Stocks shall not be issued for a consideration less than the par or issued price thereof.
May be any or a combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the
stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.213
(5) Articles of Incorporation

211

Under Sec 60 any contract for the acquisition of unissued stock in a corporation still to be formed shall be
deemed a subscription within the meaning of the Corporation Code.
Under Sec 61, a subscription for shares of stock of a corporation still to be formed shall be irrevocable for a
period of 6 mos. from the date of subscription, unless all of the other subscriber consent to the revocation, or
unless the incorporation of said corporation fails to materialize within said period or within a longer period as may
be stipulated in the contract of subscription. However, no pre-incorporation subscription may be revoked after the
submission of the articles of incorporation to SEC
212
Sec. 61
213
Sec. 62
Where the consideration is other than actual cash, or consists of intangible property such as patents of
copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors,
subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for
promissory notes or future service (ibid)

54

The document prepared by the persons establishing a corporation and filed with the SEC
containing the matters required by the Code.
It defines the charter of corporation & the contractual relationship between state and
corporation, shareholders and state, corporation and shareholders.
(a) Contents
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

name of corporation;
purpose/s, indicating the primary and secondary purposes;
place of principal office;
term of existence;
names, citizenship and residences of incorporators;
number, names, citizenship and residences of directors or trustees;
names, nationalities, and residences of the persons who shall act as directors or trustees
until the first regular ones are elected and qualified;
if a stock corporation, the amount of its authorized capital stock, number of shares and
in case the shares are par value shares, the par value of each share;
names, residences, number of shares, and the amounts subscribed and paid by each of
the original subscribers which shall not be less than 25% of authorized capital stock;
if non-stock, the amount of capital, the names, residences, and amount paid by each
contributor, which shall not be less than 25% of total subscription;
name of treasurer elected by subscribers; and
if the corporation engages in a nationalized industry, a statement that no transfer of
stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage
below the required legal minimum.214
(b) Non-amendable items

Those matters referring to facts existing as of the date of the incorporation such as:
1. Names of incorporators;
2. Names of original subscribers to the capital stock of the corporation and their subscribed
and paid up capital;
3. Treasurer elected by the original subscribers;
4. Members who contributed to the initial capital of a non-stock corporation;
5. Date and place of execution of the articles of incorporation;
6. Witnesses to the signing and acknowledgment of the articles.
(6) Corporate name -- limitations on use of corporate name
No corporate name may be allowed by the Securities and Exchange Commission if the
proposed name is identical or deceptively or confusingly similar to that of any existing corporation
or to any other name already protected by law or is patently deceptive, confusing or contrary to
existing laws.215
214
215

Sec. 14
Sec. 18

55

(7) Registration and issuance of Certificate of Incorporation

Gives juridical personality to a corporation and places it under SEC jurisdiction.
(8) Election of directors or trustees
a. In any form; or
b. Must be by ballot when requested by any voting stockholder or member;
c. Voting may be in person or by proxy.
(9) Adoption of By-Laws216
(a) Requisites of valid by-laws
a. Must not be contrary to law nor with the Corporation Code
b. Must not be contrary to morals and public policy;
c. Must not impair obligations and contracts;
d. Must be general and uniform;
e. Must be consistent with the charter or articles of incorporation; and
f. Must be reasonable, not arbitrary or oppressive.
(b) Binding effects
a. As to members and corporation
They have the force of contract between the members themselves.
They are binding only upon the corporation and on its members and those having direction,
management and control of its affairs.
b. As to third persons
They are not bound to know the by-laws which are merely provisions for the government of
a corporation and notice to them will not be presumed.217
(c) Amendments
216

By-laws - rules of action adopted by a corporation for its internal government and for the regulation of conduct
and prescribe the rights and duties of its stockholders or members towards itself and among themselves in
reference to the management of its affairs.
Functions:
a. Supplement the articles of incorporation
b. Provide for details not important enough to be stated in the articles of incorporation
c. Continuing rule for the government of the corporation and the individuals composing it
d. Define the rights and duties of corporate officers and directors/trustees and of stockholders/members
towards the corporation and among themselves
e. Source of authority for corporate officers and agents of the corporation
217
By-laws have no extra-corporate force and are not in the nature of legislative enactments so far as third persons
are concerned.

56

May be amended by a majority vote of the Board of Directors and majority vote of
outstanding capital stock or a majority of the members in non-stock corporation.218
g. Corporate powers
(1) General powers, theory of general capacity
1. To sue and be sued in its corporate name;219
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3. To adopt and use of corporate seal;
4. To amend its Articles of Incorporation;
5. To adopt its by-laws not contrary to law, morals, or public policy, and to amend or
repeal the same;
6. For stock corporations: issue and sell stocks to subscribers and treasury stocks; for nonstock corporations: admit members;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal
with real and personal property, securities and bonds
8. To enter into merger or consolidation with other corporations;
9. To make reasonable donations for public welfare, hospital, charitable, cultural, scientific,
civic or similar purposes, provided that nodonation is given to any (i) political party, (ii)
candidate and (iii) partisan political activity.
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise other powers essential or necessary to carry out its purposes as stated in the
articles of incorporation.220
218

Power to amend or repeal by-laws or adopt new by-laws may be delegated by the 2/3 of the outstanding capital
stock or 2/3 of the members in the case of non-stock corporation
219
This power (Section 36(1)) is an incident to corporate existence. (De Leon 2006 at 319)
As a rule, suits are to be brought by or against the corporation in his own name.
Corporation de facto may sue or be sued but a corporation which has been dissolved after the expiration of 3year winding-up period ceases to exist de jure or de facto.
Under Sec. 36 of Corporation Code, in relation to Sec. 23, where a corporation is an injured party, its power to
sue is lodged with its Board of Directors. A minority stockholder who is a member of the Board has no such power
or authority to sue on the corporations behalf. (Tam Wing Tak v. Makasiar,
350 SCRA 475 (2001); Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002);
United Paragon Mining Corp v. CA, 2006)
Where the corporation is real party-in-interest, neither administrator or a project manager could sign the
certificate against forum-shopping without being duly authorized by resolution of the Board of Directors (Esteban,
Jr. v. Vda. De Onorio, 360 SCRA 230 [2001]), nor the General Manager who has no authority to institute a suit on
behalf of the corporation even when the purpose is to protect corporate assets.(Central Cooperative Exchange Inc.
v. Enciso, 162 SCRA 706 [1988]).
When the power to sue is delegated by the by-laws to a particular officer, such officer may appoint counsel to
represent the corporation in a pre-trial hearing without need of a formal board resolution. Citibank, N.A. v. Chua,
220 SCRA 75 (1993)
For counsel to sign the certification for the corporation, he must specifically be authorized by the Board of
Directors. (BP Leasing Corp. v. CA, 416 SCRA 4 (2003); Mariveles Shipyard Corp. v. CA, 415 SCRA 573 (2003), Metro
Drug Distribution Inc. v. Narciso,(2006 )

57

(2) Specific powers, theory of specific capacity

(a) Power to extend or shorten corporate term
Requites:
i. Approved by a majority vote of the board of directors or trustees
ii. Ratified by at least two-thirds (2/3) of the outstanding capital stock or by at least twothirds (2/3) of the members.
iii. Written notice of the proposed action and of the time and place of the meeting addressed
to each stockholder or member at his place of residence.
221

In case of extension of corporate term, any dissenting stockholder may exercise his appraisal

right.

(b) Power to increase or decrease capital stock or incur,

create, increase bonded indebtedness
Requisites:
i. Majority vote of the members of the BoD
ii. Ratification by 2/vote of the outstanding capital stock, in a meeting duly called for that
purpose with notice previously given
iii. Certificate of said corporate act shall be signed by majority of the members of the Board
and the Chairman and Secretary of the stockholders meeting
iv. Certificate must be accompanied by the Treasurers Affidavit certifying compliance with
the 25%-25% requirements as to stock corporation.222

220

Sec. 36
Enumerates some of the express powers of corporations (many of which even if not expressly provided for by
law would constitute implied powers of every entity. (p. 794 of CLVs CLR, 2007)
Enumerates 10 powers that a corporation enjoys in addition to the special powers that may be provided for in the
purpose clause of the articles of incorporation, which would also constitute express powers. (ibid., p. 795)
221
Sec. 67
222
The corporation must submit proof to the SEC that such decrease will not prejudice the rights of creditors. (SEC
Opinion no. 05-10, July 12, 2005)
A corporation cannot issue stock in excess of the amount limited by its articles of incorporation; such issue is
ultra vires and the stock so issued is void even in the hands of a bona fide purchaser for value.
SEC has limited the term bonded indebtedness to cover only indebtedness of the corporation which are
secured by mortgage on real or personal property. Debentures are issued on the basis of the general credit of the

58

(c) Power to deny pre-emptive rights

All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all
issues or disposition of shares of any class, in proportion to their respective shareholdings, unless
such right is denied by the articles of incorporation or an amendment thereto. Such pre-emptive
right shall not extend to:
1. Shares to be issued in compliance with laws requiring stock offerings or minimum stock
ownership by the public; or
2. Shares to be issued in good faith with the approval of the stockholders representing twothirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.223
(d) Power to sell or dispose of corporate assets
Requisites:
a. The sale etc. must be approved by the board ofdirectors or trustees;
b. The action of the board of directors or trustees mustbe authorized by the vote of
stockholding representing 2/3 of the outstanding capital stock including holders of non-voting
shares or 2/3 of the members as the case may be; and
c. The authorization must be done at a stockholders ormembers meeting duly called for
that purpose after written notice.224
corporation and are not secured by collaterals, and therefore do not constitute bonded indebtedness and will not
require approval of the stockholders. (Page 243 of CLVs Textbook)
A corporate bond is an obligation to pay a definite sum of money at a future time at a fixed rate of interest.
(Page 347 of De Leon, 2006)
223
Sec. 39
A pre-emptive right is the shareholders right to subscribe to all issues or disposition of shares or any class in
proportion to his present stockholdings, the purpose being to enable the shareholder to retain his proportionate
control in the corporation and to retain his equity in the retained earnings and also in the net assets in the event of
dissolution. (Page 832 of CLVs CLR, 2007)
Whenever a capital stock of a corporation is increased and new shares of stocks are issued, the new issue must
be offered first to the stockholders who are such at the rime the increase was made in proportion to their existing
shareholdings and on equal terms with other holders of the original stocks before subscriptions are received from
the general public. For example, if a stockholder with pre-emptive right owns 20% of the outstanding shares of the
corporation, he may subscribe 20% of any shares of stock issued by the corporation. This principle is known as the
right of pre- emption or pre-emptive right of stockholders (Page 355 of De Leon, 2006)
The rule [on pre-emption] aims to safeguard the right of stockholder to preserve unaltered and unimpaired his
proportionate influence and interest in the corporation and the relative value of his holdings. (Page 356 of De
Leon, 2006)
224
No ratificatory vote needed:
a. If it is necessary in the usual and regular course of business
b. if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of
the remaining business

59

(e) Power to acquire own shares

Instances:
a. To eliminate fractional shares out of stock dividends
b. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale and to purchase delinquent shares sold during said sale
c. To pay dissenting stockholders
d. To acquire treasury shares
e. Redeemable shares regardless of existence of retained earnings
f. To effect a decrease of capital stock
g. In close corporations, when there is a deadlock in the management of the business225
(f) Power to invest corporate funds in another corporation or
business
a. Approved by a majority of the board of directors or trustees; and
b. Ratified by the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations;
c. Written notice of the proposed investment and the time and place of the meeting shall be
addressed to each stockholder or member.
Any dissenting stockholder shall have appraisal right.226
(g) Power to declare dividends
General rule: Dividends can only be declared and paid out of actual and bona fide
unrestricted retained earnings.227
225

In letters a-c, there must be unrestricted retained earnings

The other purposes for which the funds may be invested must be among those enumerated as secondary
purposes and must further comply with the requirements of Section 42.
227
Dividends - corporate profits set aside, declared, and ordered to be paid by the directors for distribution among
shareholders at a fixed time.
Forms:
a. Cash
b. Property
c. Stock
While cash dividends due on delinquent shares can be applied to the payment of the unpaid balance, stock
dividends cannot be applied as payment for unpaid subscription.
226

60

Special rules:
a.Where a corporation sold its real property, which is not being used for business, at a gain,
the income derived therefrom may be availed of for dividend distribution.
b. Increase in the value of a fixed asset as a result of its revaluation is not retained earnings.
However, increase in the value of fixed assets as a result of revaluation228 may be declared as cash
or stock dividends provided that the company:
i. Has sufficient income from operations from which the depreciation on the
appraisal increase was charged
ii. Has no deficit at the time the depreciation on the appraisal increase was charged to
operations; and
iii. Such depreciation on appraisal increase previously charged to operations has not
been impaired by losses.
c. Dividends can be declared out of the amount received in excess of the par value of
shares229 when:
i. Declared only as stock dividends and not cash;
ii.No creditors are prejudiced; and
iii. There is no impairment of capital.
d. Reduction surplus can be a source of dividends. Rule on paid-in surplus is applicable.
e. No dividends can be declared out of capital except only in two instances:
i.liquidating dividends; and
ii.dividends from investments in wasting assetcorporation.230

General Rule: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in
capital stock
Except:
a. When justified by definite corporate expansion projects approved by the board of directors
b. When the corporation is prohibited under any loan agreement with any financial institution or creditor from
declaring dividends without its/his consent and such consent has not yet been secured
c. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the
corporation, such as when there is a need for special reserve for probable contingencies.
228
Revaluation surplus
229
paid-in surplus
Unlike par value shares, when no par value shares are sold at a premium, the entire consideration paid is
considered capital; hence the same cannot be declared as dividends.
230
It permits corporations solely or principally engaged in the exploitation of wasting assets to distribute the net
proceeds derived from exploitation of their holdings such as mines, oil wells, patents and leaseholds, without
allowance or deduction for depletion.

61

f. Profits realized from sale of treasury shares are part of capital and cannot be declared as
cash or stock dividend as purchase and sale of such shares are regarded as contractions and
expansions of paid-in capital.
g. Money cannot be borrowed for the payment of dividends because indebtedness is not a
retained earnings of the corporation.
h. Corporate earnings which have not yet been received even though they consist in money
which is due, cannot be included in the profits out of which dividends may be paid.
(h) Power to enter into management contract231
Requisites:
a. Approved by majority of the Board, by majority of the stockholders, of both the managed
and managing corporation.
b. If a stockholder of the managed corporation owns more than 1/3 of the managing
corporation, the management contract must be approved by at least 2/3 of the stockholders of the
managed corporation.
(i) Ultra vires acts
An act which is beyond the conferred powers of a corporation or the purposes or objects for
which it is created as defined by the law of its organization.232
An act done by a corporation outside of the express and implied powers vested in it by its
charter and by the law.233
i. Applicability of ultra vires doctrine
The ultra vires doctrine typically applies to a corporate body so that any act done by the
body which is beyond its capacity to act will be considered invalid.
ii. Consequences of ultra vires acts
a. Executed contract courts will not set aside or interfere with such contracts;
231

1. Express power of a corporation

2. Management company must always be subject to the superior power of the board to give specific directions
from time to time or to recall the delegation of managerial power. (The Corporation Code of the Philippines
Annotated, Hector de Leon, 2002 ed.)
Management contract - any contract whereby a corporation undertakes to manage or operate all orsubstantially
all of the business of another corporation.
A management contract should not be valid for more than 5 years for any one term. You can just keep
renewing it provided, that it is not for more than 5 years at any one time
232
Republic vs. Acoje Mining Co., Inc. 7 SCRA 361
233
Bar Review Materials in Commercial Law, Jorge Miravite, 2002 ed.

62

b. Executory contracts no enforcement even at the suit of either party234

c. Part executed and part executory principle of no unjust enrichment at expense of
another shall apply; and
d. Executory contracts apparently authorized but ultra vires the principle of estoppel shall
apply.
(j) Doctrine of individuality of subscription
A subscription is one entire and indivisible whole contract. It cannot be divided into
portions
(k) Doctrine of equality of shares
Where the articles of incorporation do not provide for any distinction of the shares of stock,
all shares issued by the corporation are presumed to be equal and enjoy the same rights and
privileges and are also subject to the same liabilities.235
(l) Trust fund doctrine
The subscribed capital stock of the corporation is a trust fund for the payment of debts of
the corporation which the creditors have the right to look up to satisfy their credits, and which the
corporation may not dissipate. The creditors may sue the stockholders directly for the latters unpaid
subscription.236
(3) How exercised
(a) By the shareholders
They have residual power of fundamental corporate changes.
(b) By the Board of Directors
234

void and unenforceable

Sec. 6
236
Application of the TFD:
1. Where the corporation has distributed its capital among the stockholders without providing for the payment
of creditors;
2. Where it had released the subscribers to the capital stock from their subscriptions;
3. Where it has transferred the corporate property in fraud of its creditors; and
4. Where the corporation is insolvent.
Coverage of the TFD:
1. If the corporation is solvent, the TFD extends to the capital stock represented by the corporations legal
capital.
2. If the corporation is insolvent, the TFD extends to the capital stock of the corporation as well as all of its
property and assets.
Exceptions to the TFD:
1. Redemption of redeemable shares (Sec. 8)
2. In close corporation, when there should be a deadlock and the SEC orders the payment of the appraised value
of the stockholders share. (Sec. 104)
235

63

Board must act as a body in a meeting.237

(c) By the Officers
Via authority from (1) law, (2) corporate by-laws; and (3) authorization from the board,
either expressly or impliedly by habit, custom or acquiescence in the general course of business.238
h. Stockholders and members
(1) Fundamental rights of a stockholder239
Managerial rights
a. Voting rights; and
b. Right to remove directors
Proprietary rights
a.
b.
c.
d.
e.
f.

Right to dividends;
Right to issuance of stock certificatefor fully paid shares;
Proportionate participation in the distribution of assets in liquidation;
Right to transfer of stocks in corporate books;
Right to recover stocksunlawfully sold for delinquent payment of subscription
Preemptiveright

Remedial rights
a. Individual suit a suit instituted by a shareholder for his own behalf against the
corporation;
b. Representativesuit a suit filed by a shareholder in his behalf and in behalf
likewise of other stockholders similarly situated and with a common cause
against the corporation; and
c. Derivativesuit a suit filed in behalf of the corporation by its shareholders 240
upon a cause of action belonging to the corporation, but not duly pursued by it,
237

Generally, the Board of Directors alone exercises the powers of the corporation.
It is responsible for corporate policies and the general management of the business and affairs of the corporation.
Requisites of board meetings:
1) Meeting of the Board duly assembled
2) Existence of quorum
3) Decision of the majority of the quorumduly assembled (Exception: Electionof directors requires a vote
of majority of all the members of theboard)
238
In theory, execute the policies laid down by the board.
In practice, often have wide latitude in determining the course of business operations.
239
Pandect of Commercial Law and Jurisprudence, Justice Jose Vitug, 1997 ed.
240
not creditors whose remedies are merely subsidiary such as accionsubrogatoria and accionpauliana

64

against any person or against the directors, officers and/or controlling

shareholders of the corporation.241
(2) Participation in management
(a) Proxy
It must be in writing and signed by the stockholder or member 242 and filed before the
scheduled meeting with the corporate secretary, and given to another person (as agent) authorizing
such person to exercise the voting rights of the former.
Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is
intended.
No proxy shall be valid and effective for a longer period than five years at any one time.243
(b) Voting trust
An agreement whereby one or more stockholders transfer their shares of stocks to a trustee,
who thereby acquires for a period of time the voting rights244over such shares; and in return, trust
certificates are given to the stockholder/s, which are transferable like stock certificates, subject,
however, to the trust agreement.245
241

Requisites:
(i) An existing cause of action in favor of the corporation
(ii) The stockholder/member must first make a demand upon the corporation or the management to sue unless
such a demand would be futile
(iii) The stockholder/member must be such at the time of the objectionable acts or transactions unless the
transactions are continuously injurious
(iv) The action must be brought in the name of the corporation
The number of shares of the stockholder is immaterial since he is not suing in his own behalf
The mere trustee of shares registered in his name cannot file a derivative suit for he is not a stockholder in his
own right. (Bitong vs. CA, 292 SCRA 304)
242
as principal
243
Sec. 58
The right to vote by proxy may be exercised in any of the following instances:
1. Election of the board of directors or trustees;
2. Voting in case of joint ownership of stock;
3. Voting by trustee under voting trust agreement;
4. Pledge or mortgage of shares;
5. As provided for in its by-laws.
Stockholders or members may attend and vote in their meetings by proxy (Sec. 58); directors cannot do so.
Directors must always act in person. (Sec. 25).
244
and/or any other rights
245
Limitations:
a. Cannot be entered into for a period exceeding 5 years at any one time except when it is a condition in a loan
agreement or for the purpose of circumventing the law against monopolies and illegal combinations
b. The agreement must not be used for purposes of fraud
c. It must be in writing and notarized and specify the terms and conditions thereof
d. A certified copy of the agreement must be filed with the corporation and with the SEC

65

(c) Cases when stockholders action is required

i. By a majority vote
a. To enter into management contract if any of the two (2) instances stated246 are absent;
b. To adopt, amend or repeal the by-laws.
ii. By a two-thirds vote
a. Power to extend or shorten corporate term;
b. Increase/Decrease Corporate Stock;
c. Incur, Create Bonded Indebtedness;
d. To deny pre-emptive right;
e. Sell, dispose, lease, encumber all or substantially all of corporate assets;
f. To invest in another corporation, business other than the primary purpose;
g. To declare stock dividends
h. To enter into management contract if (1) a stockholder or stockholders representing
the same interest of both the managing and the managed corporations own or control more
than1/3 of the total outstanding capital entitled to vote of the managing corporation; or (2)
a majority of the members of the board of directors of the managing corporation also constitute a
majority of the members of the board of the managed corporation;
i. To amend the articles of incorporation.
iii. By cumulative voting
A system of voting designed to increase the voting power of minority stockholders in the
election of corporate directors when more than one director is to be elected.247
e. The agreement shall be subject to examination by any stockholder of the corporation
f. Unless expressly renewed, all rights granted in the agreement shall automatically expire at the end of the
agreed period
246

infra
A stockholder is allowed to concentrate his votes and give one candidate as many votes as the number of
directors to be elected multiplied by the number of his shares shall equal.
Cumulative voting is allowed for election of members of the Board in a stock corporation. Members of the Board in
a Non-stock Corporation shall not be votedcumulatively unless specificallyprovided for in the By-laws.
The total number of votes cast by a stockholder shall not exceed thenumber of shares owned by him asshown in
the books of the corporation multiplied by the wholenumber of directors to be elected.
247

66

(3) Proprietary rights

(a) Right to dividends
General rule:
As soon as the same have been lawfully declared by the BOD, becomes a debt owing to the
SH. No revocation can be made.
Exceptions:
1) not yet announced or communicated to the public, revocable before announcement to
SHs;
2) when stock dividends are declared since these are not distributions but merely represent
changes in the capital structure, may be revoked prior to actual issuance.248
(b) Right of appraisal
The right to withdraw from the corporation and demand payment of the fair value of his
shares after dissenting from certain corporate acts involving fundamental changes in corporate
structure.249
Gives the minority an opportunity to elect a representative to theBOD. Cannot itself give theminority control of
corporate affairsbut may affect and limit the extent of majoritys control.
Theoretically, this allows theminority block to dominate theelection of BOD. However, theminority still needs the
majority inorder to constitute a quorum.
By-laws cannot provide againstcumulative voting since this right ismandated in Sec. 24 (mandatory in astock
corporation statutory right of SHs).
248
The right to dividends is based on duly recorded stockholdings; accordingly, the corporation is prohibited from
entitling thereto anyone else.
249
Instances wherein appraisal right may be exercised:
1. Extension or reduction of corporate term;
2. Change in the rights of stockholders, authorize preferences superior to those stockholders, or restrict the
right of any stockholder;
3. Corporation authorized the board to invest corporate funds in another business or purpose;
4. Corporation decides to sell or dispose of all
or substantially all assets of corporation;
5. Merger or consolidation.
Exercise of appraisal right:
1. The stockholder must be a dissenting stockholder;
2. The stockholder must made a written
demand on the corporation within 30 days after the vote was taken;
3. The proposed action is any one of the instances supra;
4. The price to be paid is the fair value of the shares on the date the vote was taken;
5. The fair value shall be agreed upon but in case there is no agreement within 60 days from the date the vote
was taken, the fair value shall be determined by a majority of the 3 distinguished persons one of whom shall be
named by the stockholder another by the corporation and the third by the two who were chosen;
6. The right of appraisal is extinguished when:
a. He withdraws the demand with the corporations consent;

67

(c) Right to inspect

1. The demand for inspection should cover only reasonable hours on business days;
2. The stockholder, member, director or trustees demanding the exercise of the
rightis one who has not improperly used any information secured through any previous
examination of the records of the corporation or any other corporation;
3. The demand must be accompanied with statement of the purpose of the inspection,
which must show good faith or legitimate purpose; and,
4. If the corporation or its officers contest such purpose or contend that there is evil motive
behind the inspection, the burden of proof iswith the corporation or such officer to showthe same.
(d) Preemptive right
It is the shareholders preferential right to subscribe to all issues or dispositions of shares of
any class in proportion to their present stockholdings.250
(e) Right to vote
Limitations on the right to vote;
1. Where the Articles of Incorporation provides for classification of shares pursuant to
Sec.6, non-voting shares are not entitled to vote except as other provided in the said section.

b. The proposed action is abandoned;

c. The SEC disapproves the action.
250
Purpose: to enable the shareholder to retain his proportionate control in the corporation and to retain his
equity in the surplus.
Extends to treasury shares in case of their reissuance.
If the shares preferentially offered to a stockholder are not subscribed or purchased by him, it does not follow
that said shares shall again be re-offered on a pro rata basis to stockholders who already exercised their
preemptive rights. There is no preemptive right with respect to the share to be re-offered.
In case additional issues of originally authorized shares:
General rule: There is no preemptive right. This is on the theory that when a corporation at its inception offers
its first shares, it is presumed to have offered all of those which it is authorized to issue.
Exception: When a corporation at its inception offers only a specified portion of its authorized capital stock for
subscription. If subsequently, it offers the remaining unsubscribed portion, there would be preemptive right as to
the remaining portion thus offered for subscription.
When pre-emptive right not available:
a. When denied by the article of incorporation
b. Shares requiring stock offering or minimum stock ownership by the public
c. Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding
capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted
debt

68

2. Preferred or redeemable shares may be deprived of the right to vote unless

otherwiseprovided.
3. Fractional shares of stock cannot be voted unless they constitute at least one full share.
4. Treasury shares have no voting rights as long as they remain in treasury.
5. Holders of stock declared delinquent by the board for unpaid subscription.
6. A transferee of stock if his stock transfer is not registered in the stock and transfer
bookof the corporation.
vote.

7. A stockholder who mortgages or pledges his shares and gives authority for creditor to
(4) Remedial rights251
(a) Individual suit
(b) Representative suit
(c) Derivative suit
(5) Obligation of a stockholder

1. Liability to the corporation for unpaid subscription;

2. Liability to the corporation for interest on
unpaid subscription if so required by the by- laws;
3. Liability to the creditors o the corporation for unpaid subscription;
4. Liability for watered stock;
5. Liability for dividends unlawfully paid;
6. Liability for failure to create corporation.
(6) Meetings
(a) Regular252 or special253
i. When and where
Regular meetings of stockholders or members shall be held annually on a date fixed in the
by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors
or trustees.
Special meetings of stockholders or members shall be held at any time deemed necessary or
as provided in the by-laws.254
251

see Fundamental Rights of a stockholder, supra

Fixed in the by-laws at regular intervals (like monthly, weekly, quarterly, etc.).Generally, no notice is required
except if required by law.
253
Called specially at a date other than the regular meeting. Notice is required.
254
Sec. 50
252

69

Meetings of directors or trustees of corporations may be held anywhere in oroutside of the

Philippines, unless the by-laws provide otherwise.255
ii. Notice
Regular meetings - written notice shall be sent to all stockholders or members of record at
least two (2) weeks prior to the meeting, unless a different period is required by the by-laws.
Special meetings - at least one (1) week written notice shall be sent to all stockholders or
members, unless otherwise provided in the by-laws.256
(b) Who calls the meetings
When there is no person authorized to call a meeting, the SEC, upon petition of a
stockholder or member on a showing of good cause therefor, may issue an order to the petitioning
stockholder or member directing him to call a meeting of the corporation by giving proper notice
required by this Code or by the by-laws.
The petitioning stockholder or member shall preside thereat until at least a majority of the
stockholders or members present have been chosen one of their number as presiding officer.257
(c) Quorum
Unless otherwise provided for in the Code or in the by-laws, a quorum shall consist of the
stockholders representing a majority of the outstanding capital stock or a majority of the members in
the case of non-stock corporations.258
(d) Minutes of meetings
Formal records of business. They can be legal documents. In other cases, the minutes of the
meeting are more like a summary of what happened at the meeting.
i. Board of directors and trustees259
(1) Repository of corporate powers
The board of directors or trustees is responsible for corporate policies and general
management of the business affairs of the corporation.

255

Sec. 53
Ibid.
Notice is required for both regular and special meetings but such notice may be waived, expressly or impliedly.
257
Sec. 50
258
Sec. 52
259
responsible for corporate policies and the general management of the business and affairs of the corporation
256

70

Unless otherwise provided in the Corp. Code, the Board of Directors control and exercise
the corporate powers of corporation, all business conducted and all property of such corporation.260
The board exercises almost all corporate powers, lays down all business policies and is
responsible for the efficiency of management. The stockholders have no right to interfere with the
boards exercise of its powers and functions except where the law expressly gives them the final say,
like in cases of removal of a director, amendment of articles of incorporation, and other major
changes.261
(2) Tenure, qualifications and disqualifications of directors
Tenure:
Shall hold office for one (1) year until their successors are elected and qualified.262
Qualifications:
1. Stock Corp. - must own at least one (1) share capital stock of the corporation in his own
name;
Non-stock Corp. - must be a member
2. Majority of the corporate directors/trustees must be residents of the Philippines.263
3. He must be of legal age.
Disqualifications:
1. Convicted by final judgment of an offense punishable by imprisonment for a period
exceeding six (6) years, or
2. Violation of this Code committed within five (5) years prior to the date of his election or
appointment.264
(3) Elections
(a) Cumulative voting

260

Sec. 23
Secs. 6, 42 & 43
262
Ibid.
263
Ibid.
264
Sec. 27
By-laws
may
provide
for
additional
qualifications/disqualifications
as
long
as
such
additionalqualifications/disqualifications shall not modify requirements as prescribed in the corporation code or be
in conflict with such prescribed requirements.
261

71

Allowed for election of members of the board in a stock corporation. Members of the board
in a non-stock corporation shall not be voted cumulatively except if otherwise provided in the
articles of incorporation or by-laws.265
(b) Quorum
The owners of a majority of the outstanding capital stock, or if there be no capital stock, a
majority of the members entitled to vote.266
(4) Removal
By a vote of the stockholders holding or representing 2/3 of the outstanding capital stock,
or if the corporation be a non-stock corporation, by a vote of 2/3of the members entitled to vote.267
(5) Filling of vacancies
May be filled by a vote of at leasta majority of the remaining directors or trustees, if still
constituting a quorum.
In the following cases, the stockholders or members shall fill the vacancy:
a. When the remaining directors or trustees do not constitute a quorum;
b. If the vacancy is caused by the removal of a director or trustee
c. If the vacancy is caused by the expiration of term; and
d. In case of increase in the number of directors or trustees as a result of an amendment of
the articles authorizing such increase
(6) Compensation
In the absence of any provision in the by-laws fixing their compensation, the directors shall
not receive any compensation, as such directors, except for reasonable per diems. Any such
compensation other than per diems may be granted to directors by the vote of the stockholders
representing at least a majority of the outstanding capital stock at a regular or special stockholders'

265

See also cumulative voting under Stockholders and members, supra

st
Sec. 24, 1 sen.
267
with or without cause
Such removal shall take placeeither at a regular meeting or at aspecial meeting called for the purposeof removal of
Directors or Trustees, with previous notice of the time andplace of such meeting, as well as theintention to
propose such removal. If the officers refuse to call a meeting toconsider the removal of the Director, itmay be
called at the instance of anystockholder or member, but with duenotice.
Removal without cause may not beused to deprive minority stockholdersor members of the right of representation
to which they may beentitled to under Section 24.
The board cannot remove a director ortrustee as member of the board.
266

72

meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten
percent (10%) of the net income before income tax of the corporation during the preceding year.268
(7) Disloyalty
Where a director, by virtue of his office, acquires for himself a business opportunity which
should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he
must account to the latter for all such profits by refunding the same, unless his act has been ratified
by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding
capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his
own funds in the venture.269
(8) Business judgment rule
Sec 23 embodies the essence of the business judgment rule, that unless otherwise provided
in the Code, all corporate powers and prerogatives are vested directly in the BOD.
Consequently, the rule has two consequences:
a) The resolution, contracts and transactions of the BOD, cannot be overturned or set
aside by the SHs or members and not even by the courts under the principle that the business of the
corp. has been left to the hands of the BOD; and
b) Directors and duly authorized officers cannot be held personally liable for acts or
contracts done with the exercise of their business judgment.270
Questions of policy or management are left solely to the honest decision of officers and
directors of a corporation and the courts are without authority to substitute their judgment for the
judgment of the board of directors; the board is the business manager of the corporation and so

268

Sec. 30
Sec. 34
270
Exceptions:
a. When the Corp Code expressly provides otherwise;
b. When the directors or officers acted with fraud, gross negligence or in bad faith; and
c. When directors or officers act against the corp. in conflict-of-interest situation
General rule: Directors cannot be held liable for mistakes or errors in the exercise of their business judgment if
they acted in good faith, with due care & prudence. Contracts intra vires entered into by the board of directors are
binding upon the corp. & courts will not interfere.
Exception: If the contracts are so unconscionable & oppressive as to amount to a wanton destruction of the rights
of the minority.
Board of Directors has authority to modify theproposed terms of the contracts of thecorporation for the purpose
of making theterms more acceptable to the other contractingpartiesThe test to be applied is whether theact in
question is the direct and immediatefurtherance of the corporations business, fairlyincidental to the express
powers andreasonably necessary to their exercise. If so,the corporation has the power to do it;otherwise not.
[Montelibano v. Bacolod MurciaMilling Co. (1962)
269

73

long as it acts in good faith its orders are not reviewable by the courts or the SEC. The directors are
also not liable to the stockholders in performing such acts.271
(9) Solidary liabilities for damages
Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts
of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors
or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.272
(10) Liability for watered stocks
Any director or officer of a corporation consenting to the issuance of stocks for a
consideration less than its par or issued value or for a consideration in any form other than cash,
valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his
objection in writing and file the same with the corporate secretary, shall be solidarily liable with the
stockholder concerned to the corporation and its creditors for the difference between the fair value
received at the time of issuance of the stock and the par or issued value of the same.273
(11) Personal liabilities
Corporate officers are not personally liable for their corporate acts unless:
a) They have exceeded their authority; or
b) Acted with bad faith or malice
(12) Responsibility for crimes
Since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by
its officers, since it does not have the essential element of malice; in such case, the responsible
officers would be criminally liable.274
While it is true that a criminal case can only be filed against the officers and not against the
corporation itself, it does not follow that the corporation cannot be a real party-in-interest for the
purpose of bringing a civil action for malicious prosecution for the damages incurred by the
corporation for the criminal proceedings brought against its officer.275
(13) Special fact doctrine

271

Phil. Stock Exchange, Inc. vs. Court of Appeals, 281 SCRA 232 (1997)
st
Sec. 31, 1 par.
273
Sec. 65
274
People vs. Tan Boon Kong, 54 Phil. 607 (1930); Sia vs. CA, 121 SCRA 655 (1983); Times, Inc. vs. Reyes, 39 SCRA
303 (1971)
275
Cometa vs. CA
272

74

Conceding the absence of a fiduciary relationship in the ordinary case, courts nevertheless
hold that where special circumstances of acts are present which make it inequitable for the director
to withhold information from the stockholder, the duty to disclose arises and concealment is
fraud.276
Director takes advantage of an information by virtue of his office to the disadvantage of the
corporation.
(14) Inside information
The fiduciary position of insiders, directors, and officers prohibits them from using
confidential information relating to the business of the corporation to benefit themselves or any
competitor corporation in which they may have a mere substantial interest.
The liability of a director or officer guilty of using inside information is to the corporation
and not to any individual stockholder
Since loss and prejudice to the corporation is not a requirement for liability, the corporation
has a cause of action as long as there is unfair use of inside information
It is inside information if it is not generally available to others and is acquired because of the
close relationship of the director or officer of the corporation.277
(15) Contracts
(a) By self-dealing directors with the corporation
A contract of the corporation with one or more of its directors or trustees or officers is
voidable, at the option of such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract
was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of
directors.
Where any of the first two conditions set forth is absent, in the case of a contract with a
director or trustee, such contract may be ratified by the vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a
meeting called for the purpose, provided:
276

Strong v Repide, 1909

Secs.3.8, 23.2, 27,61, 71.2, Securities Regulation Code
General rule: (Majority view) Directors owe no fiduciary duty to stockholders but they may deal with them at arms
length. No duty to disclose facts known to the director or officer.
277

75

(1)full disclosure of the adverse interest of the directors or trustees involved is made at such
meeting; and
(2) the contract is fair and reasonable under the circumstances.278
(b) Between corporations with interlocking directors
Except in cases of fraud, and provided the contract is fair and reasonable under the
circumstances, a contract between two or more corporations having interlocking directors shall not
be invalidated on that ground alone. If the interest of the interlocking director in one corporation is
substantial and his interest in the other corporation or corporations is merely nominal, he shall be
subject to the provisions of Section 32 279 insofar as the latter corporation or corporations are
concerned.
Stockholdings exceeding twenty percent(20%) of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.280
(16) Executive committee
(a) Creation
The by-laws of a corporation may create an executive committee, composed of not less than
three members of the board, to be appointed by the board. Said committee may act, by majority
vote of all its members, on such specific matters within the competence of the board, as may be
delegated to it in the by-laws or on a majority vote of the board.281
(b) Limitations on its powers
Powers that cannot be delegated to the executive committee:
1. Approval of any action requiring concurrence of stockholders;
2. Filling of vacancies in the board;
3. Adoption, amendment or repeal of by-laws;
4. Amendment or repeal of board resolution which by its terms cannot be amended
or repealed;
5. Distribution of cash dividends.282
(17) Meetings
(a) Regular or special
i. When and where

278

Sec. 32
supra
280
Sec. 33
281
st
Sec. 35, 1 sen.
282
nd
Ibid., 2 sen.
279

76

Regular meetings - shall be held monthly, unless the by-laws provide otherwise.
Special meetings - may be held at any time upon the call of the president or as provided in
the by-laws.
Meetings of directors or trustees of corporations may be held anywhere in or outside of the
Philippines, unless the by-laws provide otherwise.283

ii. Notice
Must be sent to every director or trustee at least one (1) day prior to the scheduled meeting,
unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either
expressly or impliedly.284
(b) Who presides
The president shall preside at all meetings of the directors or trustee as well as of the
stockholders or members, unless the by-laws provide otherwise.285
(c) Quorum
Unless the articles of incorporation or the by-laws provide for a greater majority, a majority
of the number of directors or trustees as fixed in the articles of incorporation.286
(d) Rules on abstention
When it comes time for directors to vote on an issue, a director may vote "yes" or "no." If a
director abstains from voting, that means the director has not voted. An abstention is a non-vote, a
decision not to make a decision.287 The president votes on all motions, not just to break ties.
An abstention may have the practical effect of a "no" vote since the motion may fail for lack
of sufficient "yes" votes. Unless a greater number is called for in the articles or bylaws, a matter is
deemed "approved" by the board if at any meeting at which a quorum is present at least a majority
of the required quorum of directors votes in favor of the action.
For example, if five directors are present (out of five) and there is a motion to close the pool
each day at 8:00 p.m. (from the current 10:00 p.m.) and two directors vote "yes," two directors vote
"no," and one abstains, the motion fails. The vote needed a majority of three yes votes to pass and it

283

Sec. 53
Ibid.
285
Sec. 54
Some by-laws provide that the Chairman of the board of directors or trustees presides at board meetings.
286
nd
Sec. 25, 2 par.
287
Robert's Rules of Order, 10th ed., p 43
284

77

only received two. Accordingly, the pool remains open to 10:00 p.m. each night. Under limited
circumstances, a director may change his/her vote or the matter may be reconsidered at a later date.
When the chair calls for a vote, abstentions are not called for, only the ayes and nays. 288 The
burden is on an abstaining director to speak up if he/she wants to be recorded as an abstention. If
the vote is called for and one of the directors fails or refuses to indicate "yes," "no" or "abstain," and
the chair of the meeting deems the director to have voted "yes" and the silent director does not
object, the vote is counted as a "yes" vote.
Whenever a director believes he/she has a conflict of interest, the director should abstain
from voting on the issue and make sure his/her abstention is noted in the minutes. 289 The other
reason a director might abstain is that he/she believes there was insufficient information for making
a decision. Otherwise, directors should cast votes on all issues put before them. Failure to do so
could be deemed a breach of their fiduciary duties.
j. Capital affairs
(1) Certificate of stock
(a) Nature of the certificate
Evidences of ownership of stock in a corporation. They are transferable in the manner
provided for 290 but the transfer shall bind the parties only when recorded in the books of the
corporation. Shares of stock being personal property can also be pledged.
(b) Uncertificated shares
Mutual fund shares which are maintained on the transfer agent's records, but for which stock
certificates have not been issued, also called book shares.291
(c) Negotiability
i. Requirements for valid transfer of stocks
No transfer shall be valid, except as between the parties, until the transfer is recorded in the
books of the corporation showing the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and the number of shares transferred.292
(d) Issuance
i. Full payment
288

Ibid.
Ibid., p. 394
290
See Sec. 63
291
www.investorwords.com
292
See Sec. 63
289

78

No certificate of stock shall be issued to a subscriber until the full amount of his
subscription together with interest and expenses (in case of delinquent shares), if any is due, has
been paid.293
ii. Payment pro-rata
General rule: entire subscription must be paid first before the certificates of stock can be
issued. Partial payments are to be applied pro rata to each share of stock subscribed.294
Exception: in the Baltazar vs. Lingayen Gulf Electric Power Co case, it was the practice of the
corp. to issue certificates of stock to its individual SHs for unpaid shares of stock and to give full
voting power to shares fully paid.
(e) Stock and transfer book295
i. Contents
Record of:
(1) All stocks in the names of the stockholders alphabetically arranged;
(2) The installment paid and unpaid on all stock for which subscription has been made, and
the date of payment of any installment;
(3) A statement of every alienation, sale or transfer of stock made; and
(4) Such other entries as the by-laws may prescribe.296
ii. Who may make valid entries
The corporate secretary is the officer who is duly authorized to make entries on the stock
and transfer book.297
(f) Lost or destroyed certificates
Procedure for re-issuance in case of loss, stolen or destroyed certificates:
1. The registered owner of certificates of stock or his legal representative shall file with the
corporation an affidavit setting forth as far as possible:
293

Sec. 64
Nava v Peers Mktg Corp and FuaCun v Summers
295
The stock and transfer book is the best evidence of the transactions that must be entered or stated therein.
However, the entries are considered prima facie evidence only and may be subject to proof to the contrary
(Lanuza v. Court of Appeals, 454 SCRA 54)
296
Gokongwei v. SEC, 278 SCRA 793 (1997)
297
Garcia v. Jomouad, 323 SCRA 424 (2000)
294

79

a) the circumstances as to how the certificates were lost, stolen or destroyed;

b) the number of shares represented by each certificate, the serial numbers of the certificates;
c) the name of the corp. which issued the same;
d) such other information and evidence which he may deem necessary.
2. The corp. shall publish a notice in a newspaper of general circulation published in the
place where the corp. has its principal office, once a week for 3consecutive weeks at the expense of
the owner of the certificate of stock, which has been lost, stolenor destroyed.
3. After the expiration of one (1) year from thedate of the last publication and if no contest
has been presented, the corp. shall cancel in its booksthe certificate of stock and issue in lieu thereof
new certificates of stock. The right to make such contestshallbe barred after the expiration of the
one-yearperiod.4. Even before the one year period expires, thenew certificates may be issued if the
registeredowner files a bond or other security, running for a period of one (1) year for a sum and in
such form and with such sureties as may be satisfactory to the BOD. Provided, that if there is a
pending contest regarding the ownership of said certificates, the issuance of new certificates shall be
suspended until the final decision of the court regarding theownership of the certificate of stock.298
(g) Situs of the shares of stock
Generally at the domicile of the owner.
For purposes of execution, attachment and garnishment, the situs of shares of stock is the
domicile of the corporation. For the purpose of registering the chattel mortgage over the shares of
stock, the situs of shares shall be the province in which the corporation has its principal business or
office.
For purposes of taxation, it is the domicile of the corporation that is generally controlling.
(2) Watered stocks
(a) Definition
Stocks issued gratuitously, money/property less than par value, services less than par
value, dividends where no surplus profits exist.
(b) Liability of directors for watered stocks
Any director or officer of a corporation consenting to the issuance of stocks for a
consideration less than its par or issued value or for a consideration in any form other than cash,
valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his
objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the

298

Except in cases of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be
brought against the corp. which shall have issued certificates of stock in lieu of those lost, stolen or destroyed
pursuant to the above procedure.

80

stockholder concerned to the corporation and its creditors for the difference between the fair value
received at the time of issuance of the stock and the par or issued value of the same.299
(c) Trust fund doctrine for liability for watered stocks
"It is established doctrine that subscriptions to the capital of a corporation constitute a fund
to which creditors have a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for
the payment of its debts.300A corporation has no power to release an original subscriber to its capital
stock form the obligation of paying for his shares, without a valuable consideration for such release;
and as against creditors a reduction of the capital stock and take place only in the manner and under
the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover,
strict compliance with the statutory regulations is necessary.301"
Likewise, under Sec. 65 of the Corporation Code, no distinction is made as to creditors
whether they become such prior to or subsequent to the issuance of the watered stock and fraud is
not made an element. In any event, Sec. 65 is by itself sufficient basis to hold a stockholder liable to
any corporate creditor.
The legal standing of corporate creditors against guilty stockholders and officers for watered
stock is clear in a situation when the corporation is insolvent since then all corporate assets would be
held for the satisfaction of the claims of the creditors, before any distribution is made to the
stockholders. But when the corporation is still a "going concern" and the watering of the stock does
not actually render it insolvent, does Sec. 65 actually grant corporate creditors the legal standing to
bring at that point a suit against the involved stockholder and the guilty officers?
In the payment of property for subscribed shares, Sec. 62 of the Corporation Code provides
that "the valuation thereof shall initially be determined incorporators or the board of directors
subject to approval by the Securities and Exchange Commission." In actual practice the watering of
stock is not supposed to happen because property consideration for subscription is always evaluated
by the Securities and Exchange Commission which often conducts an examination of the involved
properties and appraisal reports are submitted to establish the fair value of such properties. When
the Securities and Exchange Commission approves the valuation it may be difficult to sustain an
assertion later on that there has been watering of the shares.302
(3) Payment of balance of subscription
(a) Call by board of directors303
299

Sec. 65
Velasco vs. Poizat, 37 Phil., 802
301
14 C.J., 498,620
302
Cesar L. Villanueva, The Trust fund doctrine under Philippine corporate setting
303
Call is a declaration by the board of directors that the unpaid subscriptions are due and payable to the
corporation.
The word call is capable of three meanings, namely: (a) a resolution of the BoD for the payment of unpaid
subscriptions; (b) notification of such resolution made on the stockholders; or (c) the time when subscriptions
become payable. (CLVs Textbook. P. 392)
300

81

Subject to the provisions of the contract of subscription, the board of directors of any stock
corporation may at any time declare due and payable to the corporation unpaid subscriptions to the
capital stock and may collect the same or such percentage thereof, in either case, with accrued
interest, if any, as it may deem necessary.304
(b) Notice requirement
Payment of any unpaid subscription or any percentage thereof, together with the interest
accrued, if any, shall be made on the date specified in the contract of subscription or on the date
stated in the call made by the board. Failure to pay on such date shall render the entire balance due
and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless
a different rate of interest is provided in the by-laws, computed from such date until full payment. If
within thirty (30) days from the said date no payment is made, all stocks covered by said
subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided,
unless the board of directors orders otherwise.305
(4) Sale of delinquent shares
(a) Effect of delinquency306
Unless the delinquent stockholder pays to the corporation, on or before the date specified
for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs
of advertisement and expenses of sale, or unless the board of directors otherwise orders, said
delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount
of the balance on the subscription together with accrued interest, costs of advertisement and
expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased
shall be transferred to such purchaser in the books of the corporation and a certificate for such
stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the
delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock
covering such shares.307
(b) Call by resolution of the board of directors

304

st

Sec. 67, 1 par.

While the board may call for payment of the subscription at any time, if the subscription contract specifies a
date for payment thereof, the board must respect said contract. Thus, unpaid subscription plus interest is payable
on a date agreed upon, or upon call by the board of directors.
305
nd
Id., 2 par.
306
(1) Deprives the stockholder the right:
a) To be voted for; or
b) To be entitled to vote; or
c) To representation at any stockholders meeting
(2) Delinquent stockholder shall not be entitled to any of the rights of
a stockholder but he shall still be entitled to receive dividends.
(3) Delinquent stocks shall be subject to delinquency sale
307
rd
Sec. 68, 3 par.

82

The board of directors may, by resolution, order the sale of delinquent stock and shall
specifically state the amount due on each subscription plus all accrued interest, and the date, time
and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from
the date the stocks become delinquent.308
(c) Notice of sale
Notice of said sale, with a copy of the resolution, shall be sent to every delinquent
stockholder either personally or by registered mail. The same shall furthermore be published once a
week for two (2) consecutive weeks in a newspaper of general circulation in the province or city
where the principal office of the corporation is located.309
(d) Auction sale
Should there be no bidder at the public auction who offers to pay the full amount of the
balance on the subscription together with accrued interest, costs of advertisement and expenses of
sale, for the smallest number of shares or fraction of a share, the corporation may bid for the same,
and the total amount due shall be credited as paid in full in the books of the corporation. Title to all
the shares of stock covered by the subscription shall be vested in the corporation as treasury shares
and may be disposed of by said corporation in accordance with the provisions of this Code310
(5) Alienation of shares
(a) Allowable restrictions on the sale of shares
Restrictions on the right to transfer shares must appear in the
1. Articles of incorporation
2. By-laws
3. Certificate of stock
Otherwise, the same shall not bebinding on any purchaser in good faith.311
(b) Sale of partially paid shares
Any unpaid balance on the subscriptionthere can be no stock certificate on which an
indorsement may be made. Shares are thus not transferable on the books
308

st

Id., 1 par.
nd
Id., 2 par.
310
Id., last par.
311
Sec. 98
Said restrictions shall not be moreonerous than granting the existing stockholders or the corporation theoption to
purchase the shares of thetransferring stockholder with such reasonable terms, conditions or periodstated therein.
If upon the expiration of said period,the existing stockholders or the corporation fails to exercise the optionto
purchase, the transferringstockholder may sell his shares to any third person.
309

83

(c) Sale of a portion of shares not fully paid

Stockholder cannot transfer part of his subscriptionindivisibility of subscription of
contract.312
(d) Sale of all of shares not fully paid
Entire subscription not fully paid may be transferred to a single transferee.313
(e) Sale of fully paid shares
Shares of stock issued with stock certificates become personal property and may be
transferred by delivery of the certificate endorsed by the owner.314
(f) Requisites of a valid transfer
a) delivery of the certificate or certificates; and
b) indorsed by the owner or his attorney-in-fact or other person legally authorized to make
the transfer.
(g) Involuntary dealings
Involuntary Alienation -alienation against the wishes of the transferor, as by attachment.315
k. Dissolution316 and liquidation317
(1) Modes of dissolution
(a) Voluntary

312

Nava and FuaCun

Difficult to determine whether or not partial payments made should be applied as full payment.
313
Must secure the consent of the corporation since the transfer contemplates a novation of contract.
But cannot be forced upon the corporation
314
See Sec. 63
315
Blacks Law dictionary
316
Extinguishment of the franchise of a corporation and the termination of its corporate existence.
317
Liquidation, in corporation law, connotes a winding up or settling with creditors and debtors. It is the winding
up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing
assets to cash, discharging liabilities and dividing surplus or loss. (PVB Employees Union-N.U.B.E. v. Vega, 360 SCRA
33 (2001)
Process by which all the assets of the corporation are converted into liquid assets in order to facilitate the
payment of obligations to creditors, and the remaining balance if any is to be distributed to the stockholders.
(Reburiano v. Court of Appeals, 301 SCRA 342 (1999)
If full liquidation can only be effected after the 3-year period and there is no trustee, the directors may be
permitted to complete the liquidation by continuing as trustees by legal implication.

84

i. Where no creditors are affected

a. A meeting must be held on the call of directors or trustees;
b. Notice of the meeting should be given to the stockholders by personal delivery or
registered mail at least 30 days prior to the meeting;
c. The notice of meeting should also be published for 3 consecutive weeks in a newspaper
published in the place;
d. The resolution to dissolve must be approved by the majority of the directors/trustees and
approved by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of
members;
e. A copy of the resolution shall be certified by
trustees and countersigned by the secretary;

the

majority

of

the

directors

or

f. The signed and countersigned copy will be filed with the SEC and the latter will issue the
certificate of dissolution.318
ii. Where creditors are affected
a. Approval of the stockholders representing at least 2/3 of the outstanding capital stock or
2/3 of members in a meeting called for the purpose;
b. Filing a petition with the SEC signed by majority of directors or trustees or other officers
having the management of its affairs verified by President or Secretary
or Director. Claims and demands must be stated in the petition;
c. If Petition is sufficient in form and substance, the SEC shall issue an Order fixing a
hearing date for objections;
d. A copy of the Order shall be published atleast once a week for 3 consecutive weeks in a
newspaper of general circulation or if there is no newspaper in the municipality or city of the
principal office, posting for 3 consecutive weeks in 3 public places is sufficient;
e. Objections must be filed no less than 30 days nor more than 60 days after the entry of
the Order;
f. After the expiration of the time to file objections, a hearing shall be conducted upon
prior 5 day notice to hear the objections;
g. Judgment shall be rendered dissolving the corporation and directing the disposition of
assets; the judgment may include appointment of a receiver.319
iii. By shortening of corporate term
318
319

Sec. 118
Sec. 119

85

This is done by amending the Articles of Incorporation.

(b) Involuntary
By filing a verified complaint with the SEC based on any ground provided by law or rules.
i. By expiration of corporate term
When the period of corporate life expires, the corporation ceases to be a body corporate for
the purpose of continuing the business for which it was organized.320
ii. Failure to organize and commence business within
2 years from incorporation
Non-user for 2 years321-when the corporation does not formally organize and commence the
transaction of its business or the construction of its works within 2 years from the date of its
incorporation, its corporate powers cease and the corporation shall be deemed dissolved.322
iii. Legislative dissolution
Through appropriate laws passed by Congress.

iv. Dissolution by the SEC on grounds under existing

laws
1. Fraud or misrepresentation as to the paid-up capital of the corporation (25%-25%
requirement)
2. Misrepresentation
3. Ultra vires mala prohibita, but too numerous infractions, which are persistent despite SEC
earnings.323
4. Continuous inactivity of the corporation for at least five (5) years
5. Refusal to adopt or approve by-laws.324

320

PNB v. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294 (1992)
non-use of charter
322
automatic
323
Republic vs. Security Credit and Acceptance Corp., 19 SCRA 58 (1967)
324
P.D. 902-A
321

86

(2) Methods of liquidation

(a) By the corporation itself
Liquidation by the corporation itself through its Board of directors who have only 3 years to
finish its work of liquidation.325
(b) Conveyance to a trustee within a 3-year period
Conveyance of all corporate assets to trustees who will take charge of liquidation. Unless the
trusteeship is limited in its duration by the deed of trust, the 3-year limitation will not apply as long
as the designation of trustees is made within said period. The Board who cant finish liquidating in
time may let trustees take over the job.326
(c) By management committee or rehabilitation receiver
Liquidation by a receiver who may have been appointed by the SEC upon its decreeing the
dissolution of the corporation. 3-year period does not apply because the corporation is substituted
by the receiver. However, the mere appointment of a receiver, without anything more, does not
result in the dissolution of the corporation nor bar it from the exercise of its corporate rights.
(d) Liquidation after three years
There is nothing in Sec. 122 which bars an action for the recovery of the debts of the
corporation against the liquidator thereof, after the lapse of the said three-year period. Is immaterial
that the present action was filed after the expiration of the three years . . . for at the very least,
andassuming that judicial enforcement of taxes may not beinitiated after said three years despite the
fact that actualliquidation has not terminated and the one in charge thereof is still holding the assets
of the corporation, obviously for the benefit of all the creditors thereof, the assessment
325

After the dissolution of the corporation, it continues to exist as a body corporate, but only for the purpose of
prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and
convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was
established.
326
Anytime during the 3 year period, the corporation is authorized and empowered to convey all of its property to
trustees for the benefit of shareholders and other persons in interest.
If the 3-year extended life has expired without a trustee or receiver having been designated, the Board of
Directors itself, following the rationale of the decision in Gelano, may be permitted to so continue as trustees to
complete liquidation; and in the absence of a Board, those having pecuniary interest in the assets, including the
shareholders and the creditors of the corporation, acting for and in its behalf, might make proper representations
with the appropriate body for working out a final settlement of the corporate concerns. (Clemente v. Court of
Appeals, 242 SCRA 717 (1995))
In Gelano case, the counsel of the dissolved corporation was considered a trustee. In the later case of Clemente
v. Court of Appeals, the Board of Directors was permitted to complete the corporate liquidation by continuing as
trustees. Under Sec. 145 No right of remedy in favor or against any corporation . . . shall be removed or
impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of
this Code or of any part thereof. This provision safeguards the rights of a corporation which is dissolved pending
litigation. (Reburiano v. Court of Appeals, 301 SCRA 342 (1999); Knecht v. United Cigarette Corp., 384 SCRA 48
(2002).

87

aforementioned, made within the three years, definitely established the Government as a creditor of
the corporation for whom the liquidator is supposed to hold assets of the corporation.327
l. Other corporations
(1) Close corporations
A special kind of stock corporation:
1. whose articles of incorporation should provide that:
a. the number of stockholders shall not exceed 20;
b. issued stocks are subject to transfer restrictions, with a right of preemption in
favor of the stockholders or the corporation; and
c. the corporation shall not be listed in the stock exchange or its stocks should not
be publicly offered; and
2. At least 2/3 of the voting stocks or voting rights should not be owned or controlled by
another corporation which is not a close corporation.328

(a) Characteristics of a close corporation

1. Stockholders may act as directors without need of election and therefore are liable as
directors;
2. Stockholders who are involved in the management of the corporation are liable in the
same manner as directors are.
3. Quorum may be greater than mere majority;
4. Transfers of stocks to others, which would increase the number of stockholders to more
than the maximum are invalid;
5. Corporate actuations may be binding even without a formal board meeting, if the
stockholder had knowledge or ratified the informal action of the others;
6. Preemptive right extends to all stock issues;
7. Deadlocks in board are settled by the SEC, on the written petition by any stockholder; and
327

Republic v. Marsman Dev. Co., 44 SCRA 418 (1972)

Sec. 96

328

88

8. Stockholder may withdraw and avail of his right of appraisal.329

(b) Validity of restrictions on transfer of shares
Restrictions on the right to transfer shares must appear in the articles of incorporation and in
the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any
purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the
existing stockholders or the corporation the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration
of said period, the existing stockholders or the corporation fails to exercise the option to purchase,
the transferring stockholder may sell his shares to any third person.330
(c) Issuance or transfer of stock in breach of
qualifying conditions
Effects:
1. If stock of a close corporation is issued or transferred to any person who is not entitled
under any provision of the articles of incorporation to be a holder of record of its stock, and if the
certificate for such stock conspicuously shows the qualifications of the persons entitled to be
holders of record thereof, such person is conclusively presumed to have notice of the fact of his
ineligibility to be a stockholder.
2. If the articles of incorporation of a close corporation states the number of persons, not
exceeding twenty (20), who are entitled to be holders of record of its stock, and if the certificate for
such stock conspicuously states such number, and if the issuance or transfer of stock to any person
would cause the stock to be held by more than such number of persons, the person to whom such
stock is issued or transferred is conclusively presumed to have notice of this fact.
3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer
of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of
the fact that he has acquired stock in violation of the restriction, if such acquisition violates the
restriction.
4. Whenever any person to whom stock of a close corporation has been issued or transferred
has, or is conclusively presumed under this section to have, notice either (a) that he is a person not
eligible to be a holder of stock of the corporation, or (b) that transfer of stock to him would cause
the stock of the corporation to be held by more than the number of persons permitted by its articles
of incorporation to hold stock of the corporation, or (c) that the transfer of stock is in violation of a
restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of
stock in the name of the transferee.
5. The provisions of subsection (4) shall not be applicable if the transfer of stock, though
contrary to subsections (1), (2) or (3), has been consented to by all the stockholders of the close
329

Special rules are provided for close corporations because it is essentially an incorporated partnership. (The
Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.)
330
Sec. 98

89

corporation, or if the close corporation has amended its articles of incorporation in accordance with
this Title.
6. The term "transfer", as used in this section, is not limited to a transfer for value.
7. The provisions of this section shall not impair any right which the transferee may have to
rescind the transfer or to recover under any applicable warranty, express or implied.331
(d) When board meeting is unnecessary or improperly held
Unless the by-laws provide otherwise, any action by the directors of a close corporation
without a meeting shall nevertheless be deemed valid if:
or

1. Before or after such action is taken, written consent thereto is signed by all the directors;

2. All the stockholders have actual or implied knowledge of the action and make no prompt
objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or implied
acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question and none of
them makes prompt objection thereto in writing.
If a director's meeting is held without proper call or notice, an action taken therein within
the corporate powers is deemed ratified by a director who failed to attend, unless hepromptly files
his written objection with the secretary of the corporation after having knowledge thereof.332
(e) Preemptive right
The pre-emptive right of stockholders in close corporations shall extend to all stock to be
issued, including reissuance of treasury shares, whether for money, property or personal services, or
in payment of corporate debts, unless the articles of incorporation provide otherwise.333
(f) Amendment of articles of incorporation
Any amendment to the articles of incorporation which seeks to delete or remove any
provision required by this Title to be contained in the articles of incorporation or to reduce a
quorum or voting requirement stated in said articles of incorporation shall not be valid or effective
unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock,
whether with or without voting rights, or of such greater proportion of shares as may be specifically
provided in the articles of incorporation for amending, deleting or removing any of the aforesaid
provisions, at a meeting duly called for the purpose.334
331

Sec. 99
Sec. 101
333
Sec. 102
334
Sec. 103
332

90

(g) Deadlocks
When the directors or stockholders are so divided respecting the management of the
corporations business and affairs that the votes required for any corporate action cannot be
obtained, with the consequence that the business and affairs of the corporation can no longer be
conducted to the advantage of the stockholders generally.335
(2) Non-stock corporations
(a) Definition
A corporation organized for an eleemosynary purpose, and no part of whose income is,
during its existence, distributable as dividends to its members, trustees, or officers, subject to the
provisions of the Corporation Code on dissolution.336
(b) Purposes
Charitable, religious, educational, professional, cultural, recreational, fraternal, literary,
scientific, social, civic service, or similar purposes, like trade, industry, agricultural.337

(c) Treatment of profits

Any profit which it may obtain as an incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or purposes for which it was organized.
(d) Distribution of assets upon dissolution
1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged or
adequate provision shall be made therefor

335

st

Sec. 104, 1 par.

Powers of the SEC in case of deadlock in close corporations:
1. Cancel or alter any provision in the articles of incorporation or bylaws
2. Cancel, alter or enjoin any resolution of the corporation
3. Direct or prohibit any act of the corporation
4. Require the purchase at their fair value of shares of any stockholder either by any stockholder or by the
corporation regardless of the availability of unrestricted retained earnings.
5. Appoint a provisional director
6. Dissolve the corporation
7. Granting such other relief as the circumstances may warrant. (id.)
336
Sec. 87
337
Sec. 88
They are governed by the same rules established for stock corporations, whenever pertinent, subject, however, to
a number of special features.

91

2. Assets held by the corporation upon a condition requiring return, transfer or conveyance,
and which condition occurs by reason of dissolution, shall be returned, transferred or conveyed in
accordance with such requirements
3. Assets received and held by the corporation subject to limitations permitting their use only
for charitable, religious, benevolent, educational or similar purposes but not held upon a condition
requiring return, transfer or conveyance by reason of dissolution, shall be transferred or conveyed to
one or more corporations, societies or organizations engaged in activities in the Philippines
substantially similar to those of the dissolving corporation pursuant to a plan of distribution
4. Other assets, if any, shall be distributed in accordance with the provisions of the articles of
incorporation or the by-laws
5. In any other case, assets may be distributed to such persons, societies, organizations or
corporations, whether or not organized for profit, as may be specified in a plan of distribution.
The plan of distribution shall be approved by a majority vote of the board of trustees and by
2/3 of the members having voting rights at a meeting.338
(3) Religious corporations
A corporation composed entirely of spiritual persons and which is organized for the
furtherance of a religion or for perpetuating the rights of the church or for the administration of
church or religious work or property. It is different from an ordinary non-stock corporation
organized for religious purposes.
(a) Corporation sole
Aspecial form of corporation, usually associated with the clergy, consisting of one person
only and his successors, who is incorporated by law to give some legal capacities and advantages.
i. Nationality
No nationality.339
A corporation sole does not have any nationality but for purposes of applying our
nationalization laws, nationality is determined not by the nationality of its head but by the nationality
of the members constituting the sect in the Philippines even if it is headed by the Pope.340
ii. Religious societies
A non-stock corporation governed by a board but with religious purposes. It is incorporated
by an aggregate of persons, e.g. religious order, diocese, synod, sect, etc.
338

Sec. 94
Republic vs. IglesianiKristo, cited in the case of Rafael Albano. Et al. vs. Court of Appeals, et al., G.R. No. 144708,
August 10, 2001
340
Roman Catholic Apostolic Church v. LRC, 1957
339

92

(4) Foreign corporations

A corporation formed, organized or existing under any law other than those of the
Philippines, and whose laws allow Filipino citizens and corporations to do business in its own
country or state.341
(a) Bases of authority over foreign corporations
i. Consent
The legal standing of foreign corporations in the host state is founded on international law
on the basis of consent.342
Consent, as a requisite for jurisdiction over foreign corporations,is founded on
considerations of due process and fair play.As held in Pennoyer v. Neff,343 the jurisdiction of courts to
render judgment in personam is grounded on their de facto power over the defendant's person.
Therefore, his presence within the territorial jurisdiction of a court is prerequisite to its rendition of
judgment personally binding him. International Shoe Co. v. State of Washington 344expanded the
coverage by stating that due process requires only that in order to subject a defendant to a judgment
in personam, if he not be present within the territory of the forum, he must have certain minimum
contacts with it such that the maintenance of the suit does not offend "traditional notions of fair
play and substantial justice."345
ii. Doctrine of "doing business"
The Corporation Code does not define the phrase doing or transacting business.
Jurisprudential Tests346
1. Twin characterization test
a) Whether the foreign corporation is maintaining or continuing in the Philippines the
body or substance of the business for which it was organized or whether it has substantially
retired from it and turned it over another;347 and

341

Sec. 123
The definition espouses the incorporation test and the reciprocity rule and is significant for licensing purposes.
It is not permitted to transact or do business in the Philippines until it has secured a license for that purpose
from the SEC and a certificate of authority from the appropriate government agency.
342
Salonga, Private International Law, 1979 ed., p. 344.
343
95 U.S. 714, 733, 24 L. Ed. 565 (1877)
344
326 U.S. 310, 66 S.Ct. 154, 90 L.Ed.95 (1945).
345
Cesar L. Villanueva, Foreign Corporations and the Concept of Doing Business in the Philippines
346
Philippine Corporate Law, Cesar Villanueva, 2001 ed.
347
Substance Test

93

b) Whether there is continuity of commercial dealings and arrangements, contemplating

to some extent the performance of acts or works or the exercise of some functions normally
incident to and in progressive prosecution of, the purpose and object of its organization.348
2. Contract Test
Whether the contracts entered into by the foreign corporation, or by an agent acting under
the control and direction of the foreign corporation, are consummated in the Philippines.
Statutory Tests349
Acts constituting doing business:
a) Soliciting orders, service contracts, opening offices, whether called liaison offices
or branches;
b) Appointing representatives or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totaling 180 days or more;
c) Participating in the management, supervision or control of any domestic business,
firm or entity or corporation in the Philippines;350 and
d) Any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or works, or
the exercise of some of the functions normally incident to, and in
progressiveprosecution of, commercial gain or of the purpose of the business
organization.
(b) Necessity of a license to do business
i. Requisites for issuance of a license
If the Securities and Exchange Commission is satisfied that the applicant has complied with
all the requirements of this Code and other special laws, rules and regulations, the Commission shall
issue a license to the applicant to transact business in the Philippines for the purpose or purposes
specified in such license. Upon issuance of the license, such foreign corporation may commence to
transact business in the Philippines and continue to do so for as long as it retains its authority to act
as a corporation under the laws of the country or state of its incorporation, unless such license is
sooner surrendered, revoked, suspended or annulled in accordance with this Code or other special
laws.351
ii. Resident agent
An individual, who must be of good moral character and of sound financial standing,
residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines,
designated in a written power of attorney by a foreign corporation authorized to do business in the
348

Continuity Test
Foreign Investment Act of 1991 (R.A. No. 7042)
350
As defined under R.A. 7042
351
Sec. 126
349

94

Philippines, on whom any summons and other legal processes may be served in all actions or other
legal proceedings against the foreign corporation.352
(c) Personality to sue
No foreign corporation transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in
any court or administrative agency of the Philippines.353
(d) Suability of foreign corporations
Such corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine laws.354
(e) Instances when unlicensed foreign corporations may be
allowed to sue - Isolated transactions355
1. To seek redress for an isolated business transaction;
2. To protect its corporate reputation, name, and goodwill;
3. To enforce a right not arising out of a business transaction, e.g. tort that occurred in the
Philippines;
4. When the parties have contractually stipulated that Philippines is the venue of actions; and
5. When the party sued is barred by the principle of estoppel and/or principle of unjust
enrichment from questioning the capacity of the foreign corporation.
(f) Grounds for revocation of license
1. Failure to file annual reports required by the Code;
2. Failure to appoint and maintain a resident agent;
3. Failure to inform the SEC of the change of residence of the resident agent;
4. Failure to submit copy of amended articles or by-laws or articles of merger or
consolidation;
5. A misrepresentation in material matters in reports;

352

Sec. 127-128
Lorenzo Shipping Corp. v. Chubb & Sons, Inc., et al., 431 SCRA 266 (2004)
354
Ibid.
355
Foreign corporations, even unlicensed ones, can sue or be sued on a transaction or series of transactions set
apart from their common business in the sense that there is no intention to engage in a progressive pursuit of the
purpose and object of business transaction. (EriksPte.Ltd vs. CA, 267 SCRA 567)
353

95

6. Failure to pay taxes, imposts and assessments;

7. Engage in business unauthorized by SEC;
8. Acting as dummy of a foreign corporation; and
9. Not licensed to do business in the Philippines.356
m. Merger and consolidation357
(1) Definition and concept
Merger - a union whereby one or more existing corporations are absorbed by another
corporation which survives and continues the combined business.
One of the constituent corporations remains as an existing juridical person, whereas the
other corporation shall cease to exist. Merger is the disappearance of one of the corporations with
the other corporation acquiring all the assets, rights of action, and assuming all the liabilities of the
disappearing corporation.358
Consolidation - the union of two or more existing corporations to form a new corporation
called the consolidated corporation.
If there is consolidation, there will be disappearance of both the constituent corporations
with the emergence of a new corporate entity, called the consolidatedcorporation, which shall obtain
all the assets of the disappearing corporations, and likewise shall assume all theirliabilities. Also,
thenumber of shares that will be issued to each of the stockholders under the new corporation is
determined by the ration between the assets of the two (2) corporations.359
(2) Constituent v. consolidated corporation
Two or more corporations may merge into a single corporation which shall be one of the
constituent corporations or may consolidate into a new single corporation which shall be the
consolidated corporation.360
356

Sec. 134
Merger or consolidation does not become effective by mere agreement of the constituent corporations. The
approval of the SEC is required.
358
Of course, there is an arrangementas to the shares of stocks that willbe issued to the formerstockholders of the
two (2)corporations which were merged.Said stockholders are nowstockholders of the corporationwhich survives.
The proportionbetween the two (2) corporationswill be the basis of the shares of stocks that will be issued to
thestockholders under the survivingcorporation
359
In a merger or consolidation:
1. Sale of assets is always involved
2. There is automatic assumption of liabilities
3. There is continuance of the enterprise and of the stockholders
4. Title to the assets are transferred by operation of law
5. The constituent corporations are automatically dissolved
360
Sec. 76
357

96

(3) Plan of merger or consolidation

The board of directors or trustees of each corporation, party to the merger or consolidation,
shall approve a plan of merger or consolidation setting forth the following:
1. The names of the corporations proposing to merge or consolidate, hereinafter referred to
as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the same into effect;
3. A statement of the changes, if any, in the articles of incorporation of the surviving
corporation in case of merger; and, with respect to the consolidated corporation in case of
consolidation, all the statements required to be set forth in the articles of incorporation for
corporations organized under this Code; and
4. Such other provisions with respect to the proposed merger or consolidation as are
deemed necessary or desirable.361
(4) Articles of merger or consolidation
After the approval by the stockholders or members, articles of merger or articles of
consolidation shall be executed by each of the constituent corporations:
1) to be signed by the president or vice-president and
2) certified by the secretary or assistant secretary of each corporation
The articles of merger or consolidation shall set forth:
1) The plan of the merger or the plan of consolidation;
2) As to stock corporations, the number of shares outstanding, or in the case of non-stock
corporations, the number of members; and3) As to each corporation, the number of shares or
members voting for and against such plan, respectively
The articles of merger or consolidation shall be submitted to theSecurities and Exchange
Commission inquadruplicate for its approval.
(5) Procedure
a. The board of directors or trustees of each corporation shall approve a plan of merger or
consolidation
b. The plan shall be submitted for approval by the stockholders or members of each of such
corporation at separate corporate meetings duly called for the purpose
c. The articles of merger or consolidation shall be executed by each of the constituent
corporations
361

Ibid.

97

d. Submission to the SEC for approval

e. The SEC may or may not conduct a hearing
f. Issuance of certificate of merger or consolidation by the SEC
(6) Effectivity
Upon issuance by the SECof the certificate of merger and consolidation.362
(7) Limitations
a. Should not create monopolies
b. Should not eliminate free and healthy competition
c. Act 3518, Sec 20 inhibits illegal combinations
(8) Effects
1. The constituent corporations shall become a single corporation which, in case of merger
shall be the surviving corporation and, in the case of consolidation, shall be the consolidated
corporation;
2. The separate existence of the constituent corporation shall cease, except that of the
surviving corporation;
3. The surviving or consolidated corporation shall possess all rights, privileges, immunities
and powers and subject to all the duties and liabilities of a corporation;
4. The surviving or consolidated corporation shall thereafter possess all the rights, privileges,
immunities and franchises of each of the constituent corporations;
5. All property, real or personal, and all receivables due to, and all other interest of each
constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated
corporation without further act or deed;
6. The surviving or consolidated corporation shall be responsible for all the liabilities and
obligations of each of the constituent corporations;
7. Any claim, action or proceeding pending by or against any of the constituent corporations
may be prosecuted by or against the surviving or consolidated corporations; and
8. The rights of the creditors or lien upon the property of any of each constituent
corporation shall not be impaired by such merger or consolidation.363
362
363

nd

Sec. 79, 2 se.

Sec. 80

98

H. Securities Regulation Code364

1. State policy
Purposes:
1. To establish a socially conscious, free market that regulates itself
2. To encourage the widest participation of ownership in enterprises
3. To enhance the democratization of wealth
4. To promote the development of the capital market
5. To protect investors
6. To ensure full and fair disclosure about securities
7. To minimize if not totally eliminate insider trading and other fraudulent or manipulative
devices and practices which create distortions in the free market.365
2. Powers and functions of the SEC
a. Regulatory
1. Supervision over corporations, partnerships, and grantees of primary franchise;
2. Approve, reject registration statements/licensing applications;
3. Suspend, revoke, after notice and hearing primary franchise on grounds;
4. Regulate/supervise activities of persons to ensure compliance;
5. Supervise monitor, suspend or take over, exchanges, clearing agencies and SROs;
6. Recommend policies, advise, propose legislation to Congress on securities market;
7. Prepare, approve, amend or repeal rules, regulations, issue opinions
8. Enlist the aid and support of and/or deputize any and all enforcement agencies of the
Government as well as any private institution, corporation, firm, association or person in the
implementation of its powers.366
364

R.A. No. 8799

Sec. 2

365

99

b. Adjudicative
1. Issue cease and desist orders to prevent fraud or injury;
2. Punish for contempt of the Commission;
3. Compel the officers of any registered corporation or association to call meetings of
stockholders or members;
4. Issue subpoena ducestecum and summon witnesses to appear in any proceedings of the
Commission; and
5. Exercise such other powers as may be provided by law which are necessary or incidental
to the carrying out its express powers.367
3. Securities required to be registered
General rule:
A registration statement duly filed and approved by the SEC is necessary before securities
may be sold and offered for sale or distribution within the Philippines. Prior to any sale, information
on the securities, in such form and substance prescribed by the SEC, shall be made available to each
prospective purchaser.368
Exceptions:
1. Exempt securities; and
2. Exempt transactions.
a. Exempt securities
1. Any security issued or guaranteed by the Government of the Philippines, or by any
political subdivision or agency thereof, or by any person controlled by and acting as an
instrumentality of said Government.
2. Any security issued or guaranteed by the government of any country with which the
Philippines maintains diplomatic relations, or by any state, province or political subdivision or
agency thereof on the basis of reciprocity.
3. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper
adjudicatory body.

366

Sec. 5
Ibid.
368
Sec. 8
367

100

4. Any security or its derivatives the sale or transfer of which, by law, is under the
supervision and regulation of the Office of the Insurance Commission, Housing and land Use
Regulatory Board, or the Bureau of Internal Revenue.
5. Any security issued by a bank except its own shares of stock.
Any securities added by the SEC by rule or regulation after public hearing.369
b. Exempt transactions
1. Judicial saleby executor, administrator, guardian/receiver in insolvency or bankruptcy.
2. Sale of pledged or mortgaged security to liquidate a bona fide debt.
3. Sale on isolated transactions by owner.
4. Distribution of stock dividends.
5. Sale of capital stock exclusively to stockholders where no commission is paid.
6. The issuance of bonds or notes secured by mortgage upon real estate or tangible personal
property, where the entire mortgage are sold to a single purchaser at a single sale.
7. Issuance of security in exchange of any security from same issuer pursuant to right of
conversion.
8. Brokers transactions
9. Pre-incorporation subscription and subscription pursuant to an increase of the ACS.
10. Exchange of securities by issuer with

existing security holders exclusively

11. Sale to less than 20 persons during any 12- month period
12. Sale of securities to banks, registered investment house, insurance companies, pension
fund or retirement plan maintained by the government or other persons authorized by the BSP to
engage in trust functions.370
4. Procedure for registration of securities
All securities required to be registered under Subsection 8.1 shall be registered through the
filing by the issuer in the main office of the Commission, of a sworn registration statement with the
respect to such securities, in such form and containing such information and document as the
Commission prescribe. The registration statement shall include any prospectus required or permitted
to be delivered under Subsections 8.2, 8.3, and 8.4.
369

Sec. 9
Sec. 10

370

101

In promulgating rules governing the content of any registration statement (including any
prospectus made a part thereof or annex thereto), the Commission may require the registration
statement to contain such information or documents as it may, by rule, prescribe. It may dispense
with any such requirements, or may require additional information or documents, including written
information from an expert, depending on the necessity thereof or their applicability to the class of
securities sought to be registered.
The information required for the registration of any kind, and all securities, shall include,
among others, the effect of the securities issue on ownership, on the mix of ownership, especially
foreign and local ownership.
The registration statement shall be signed by the issuers executive officer, its principal
operating officer, its principal financial officer, its comptroller, its principal accounting officer, its
corporate secretary, or persons performing similar functions accompanied by a duly verified
resolution of the board of directors of the issuer corporation. The written consent of the expert
named as having certified any part of the registration statement or any document used in connection
therewith shall also be filed. Where the registration statement shares to be sold by selling
shareholders, a written certification by such selling shareholders as to the accuracy of any part of the
registration statement contributed to by such selling shareholders shall be filed.
(a) Upon filing of the registration statement, the issuer shall pay to the Commission a fee of
not more than one-tenth (1/10) of one per centum (1%) of the maximum aggregate price at which
such securities are proposed to be offered. The Commission shall prescribe by the rule diminishing
fees in inverse proportion the value of the aggregate price of the offering.
(b) Notice of the filing of the registration statement shall be immediately published by the
issuer, at its own expense, in two (2) newspapers of general circulation in the Philippines, once a
week for two (2) consecutive weeks, or in such other manner as the Commission by the rule shall
prescribe, reciting that a registration statement for the sale of such securities has been filed, and that
aforesaid registration statement, as well as the papers attached thereto are open to inspection at the
Commission during business hours, and copies thereof, photostatic or otherwise, shall be furnished
to interested parties at such reasonable charge as the Commission may prescribe.
Within forty-five (45) days after the date of filing of the registration statement, or by such
later date to which the issuer has consented, the Commission shall declare the registration statement
effective or rejected, unless the applicant is allowed to amend the registration statement as provided
in Section 14 hereof. The Commission shall enter an order declaring the registration statement to be
effective if it finds that the registration statement together with all the other papers and documents
attached thereto, is on its face complete and that the requirements have been complied with. The
Commission may impose such terms and conditions as may be necessary or appropriate for the
protection of the investors.
Upon affectivity of the registration statement, the issuer shall state under oath in every
prospectus that all registration requirements have been met and that all information are true and
correct as represented by the issuer or the one making the statement. Any untrue statement of fact

102

or omission to state a material fact required to be stated herein or necessary to make the statement
therein not misleading shall constitute fraud.371
5. Prohibitions on fraud, manipulation and insider trading
a. Manipulation of security prices
It shall be unlawful for any person acting for himself or through a dealer or broker, directly
or indirectly:
(a) To create a false or misleading appearance of active trading in any listed security traded in
an Exchange of any other trading market:
(i) By effecting any transaction in such security which involves no change in the
beneficial ownership thereof;
(ii) By entering an order or orders for the purchase or sale of such security with the
knowledge that a simultaneous order or orders of substantially the same size, time
and price, for the sale or purchase of any such security, has or will be entered by or
for the same or different parties; or
(iii) By performing similar act where there is no change in beneficial ownership.
(b) To affect, alone or with others, a securities or transactions in securities that: (I) Raises
their price to induce the purchase of a security, whether of the same or a different class of the same
issuer or of controlling, controlled, or commonly controlled company by others; or (iii) Creates
active trading to induce such a purchase or sale through manipulative devices such as marking the
close, painting the tape, squeezing the float, hype and dump, boiler room operations and such other
similar devices.
(c) To circulate or disseminate information that the price of any security listed in an
Exchange will or is likely to rise or fall because of manipulative market operations of any one or
more persons conducted for the purpose of raising or depressing the price of the security for the
purpose of inducing the purpose of sale of such security.
(d) To make false or misleading statement with respect to any material fact, which he knew
or had reasonable ground to believe was so false or misleading, for the purpose of inducing the
purchase or sale of any security listed or traded in an Exchange.
(e) To effect, either alone or others, any series of transactions for the purchase and/or sale
of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of
such security; unless otherwise allowed by this Code or by rules of the Commission.
No person shall use or employ, in connection with the purchase or sale of any security any
manipulative or deceptive device or contrivance. Neither shall any short sale be effected nor any
stop-loss order be executed in connection with the purchase or sale of any security except in
371

Sec. 12

103

accordance with such rules and regulations as the Commission may prescribe as necessary or
appropriate in the public interest for the protection of investors.
The foregoing provisions notwithstanding, the Commission, having due regard to the public
interest and the protection of investors, may, by rules and regulations, allow certain acts or
transactions that may otherwise be prohibited under this Section.372
b. Short sales
A sale of a security that the seller does not own or has not contracted for at the time of sale,
and that the seller must borrow to make the delivery. Such a sale is usually made when the seller
expects the securitys price to drop. If the price does not drop, the seller can make a profit on the
difference between the price of the shares sold and the lower price of the shares bought to pay back
the borrowed share.373
c. Fraudulent transactions
It shall be unlawful for any person, directly or indirectly, in connection with the purchase or
sale of any securities to:
(1) Employ any device, scheme, or artifice to defraud;
(2) Obtain money or property by means of any untrue statement of a material fact of any
omission to state a material fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading; or
(3) Engage in any act, transaction, practice or course of business which operates or would
operate as a fraud or deceit upon any person.374
d. Insider trading
The selling or buying of a security by an insider while in possession of material non-public
information with respect to the issuer or the security. It is considered unlawful unless:
1. The insider proves that the information was not gained from such relationship, or
2. If the other party selling to or buying from the insider375is identified, the insider proves:
a. that he disclosed the information to the other party, or
b. that he had reason to believe that the other party otherwise is also in possession of
the information.376
372

Sec. 24
Blacks Law Dictionary
374
Sec. 26
375
or his agent
376
Sec. 27.1
373

104

6. Protection of investors
a. Tender offer rule377
A publicly announced intention by a person acting alone or in concert with other persons to
acquire equity securities of a public company.
It is mandatory to make a tender offer for equity shares of a public company in an amount
equal to the number of shares that the person intends to acquire in the following circumstances:
a. The person intends to acquire 15% or more of the equity shares of a public company
pursuant to an agreement made between or among the person and one or more sellers;
b. The person intends to acquire 30% or more of the equity shares of a public company
within a period of 12 months; or
c. The person intends to acquire shares that would result in ownership of more than 50% of
the equity shares of a public company.378
b. Rules on proxy solicitation
Proxies must be issued and proxy solicitation must be made in accordance with rules and
regulations to be issued by the Commission;
Proxies must be in writing, signed by the stockholder or his duly authorized representative
and filed with the corporate secretary before the scheduled meeting;379 unless otherwise provided in
the proxy, it shall be valid only for the meeting for which it is intended; no proxy shall be valid and
effective for a period longer than 5 years at one time;380 and a broker or dealer cannot give a proxy in
respect of any security it carries for the account of a customer without the express written
authorization of such customer.381
The issuance and solicitation of proxies are regulated to minimize, if not avoid, the abuse
and misuse of the proxy device that may lead to the self-perpetuation and irresponsibility of
377

Tender offer is made:

1. By filing with the SEC a declaration to make a tender offer;
2. By furnishing the issuer or the originator of the security a statement containing such information required
under Sec. 17 of the SRC:
i. Annual Report (includes balance sheet, profit and loss statement); and
ii. Periodical reports for interim fiscal periods; and
3. By publishing all requests or invitations for tender, or materials, making a tender offer or requesting or
inviting letters of such a security.
378
Rule 19, SRC
379
Sec. 20.2
380
Sec. 20.3
381
Sec. 20.4

105

management. Management has innate advantages in the solicitation of proxies; it has the
stockholders list; it benefits from the usual inertia of stockholders; and ithas access to corporate
funds for the normally substantial costs of solicitation.382
c. Disclosure rule
It shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of
material information with respect to the issuer or the security that is not generally available to the
public, unless: (a) The insider proves that the information was not gained from such relationship; or
(b) If the other party selling to or buying from the insider (or his agent) is identified, the insider
proves: (i) that he disclosed the information to the other party, or (ii) that he had reason to believe
that the other party otherwise is also in possession of the information.383
It shall be unlawful for any insider to communicate material nonpublic information384 about
the issuer or the security to any person who, by virtue of the communication, becomes an insider as
defined in Subsection 3.8, where the insider communicating the information knows or has reason to
believe that such person will likely buy or sell a security of the issuer whole in possession of such
information.385
It shall be unlawful where a tender offer has commenced or is about to commence for:
(i) Any person386who is in possession of material nonpublic information relating to such
tender offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender
offer if such person knows or has reason to believe that the information is nonpublic and has been
acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the
securities sought or to be sought by such tender offer, or any insider of such issuer; and

382

Fundamentals of Securities Regulation, p. 432

No solicitation of proxy shall be made unless each person solicited is furnished, concurrently or earlier, with a
written proxy statement containing the information required by the SEC (SRC Rule 20, par. 3). The form of proxy,
shall be made unless each person solicited or given to stockholders at least 15 business days prior to the meeting
date (SRC Rule 20, par. 4.f).
383
Sec. 27.1
A purchase or sale of a security of the issuer made by an insider defined in Subsection 3.8, or such insiders spouse
or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to
have been effected while in possession of material nonpublic information if transacted after such information
came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time
for market to absorb such information: Provided, however, That this presumption shall be rebutted upon a
showing by the purchaser or seller that he was aware of the material nonpublic information at the time of the
purchase or sale.
384
Information is "material nonpublic" if: (a) It has not been generally disclosed to the public and would likely affect
the market price of the security after being disseminated to the public and the lapse of a reasonable time for the
market to absorb the information; or (b) would be considered by a reasonable person important under the
circumstances in determining his course of action whether to buy, sell or hold a security.
385
Sec. 27.3
386
other than the tender offeror

106

(ii) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be
sought by such tender offer, 387 and any insider of such issuer to
communicatematerialnonpublicinformation relating to the tender offer to any other person where
such communication is likely to result in a violation of Subsection 27.4 (a)(i).388
7. Civil liability
Civil Liabilities on Account of False Registration Statement.Any person acquiring a security, the registration statement of which or any part thereof
contains on its effectivity an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make such statements not misleading, and who suffers
damage, may sue and recover damages from the following enumerated persons, unless it is proved
that at the time of such acquisition he knew of such untrue statement or omission:
(a) The issuer and every person who signed the registration statement:
(b) Every person who was a director of, or any other person performing similar
functions, or a partner in, the issuer at the time of the filing of the registration statement or
any part, supplement or amendment thereof with respect to which his liability is asserted;
(c) Every person who is named in the registration statement as being or about to
become a director of, or a person performing similar functions, or a partner in, the issuer
and whose written consent thereto is filed with the registration statement;
(d) Every auditor or auditing firm named as having certified any financial statements
used in connection with the registration statement or prospectus.
(e) Every person who, with his written consent, which shall be filed with the
registration statement, has been named as having prepared or certified any part of the
registration statement, or as having prepared or certified any report or valuation which is
used in connection with the registration statement, with respect to the statement, report, or
valuation, which purports to have been prepared or certified by him.
(f) Every selling shareholder who contributed to and certified as to the accuracy of a
portion of the registration statement, with respect to that portion of the registration
statement which purports to have been contributed by him.
(g) Every underwriter with respect to such security.
If the person who acquired the security did so after the issuer has made generally available to
its security holders an income statement covering a period of at least twelve (12) months beginning
from the effective date of the registration statement, then the right of recovery under this subsection
387

shall include any securities convertible or exchangeable into such securities or any options or rights in any of the
foregoing securities
388
Sec. 27.4 (a)

107

shall be conditioned on proof that such person acquired the security relying upon such untrue
statement in the registration statement or relying upon the registration statement and not knowing
of such income statement, but such reliance may be established without proof of the reading of the
registration statement by such person.389
Civil Liabilities Arising in Connection With Prospectus, Communications and Reports.Any person who:
(a) Offers to sell or sells a security in violation of Chapter III,390 or
(b) Offers to sell or sells a security, whether or not exempted by the provisions of
this Code, by the use of any means or instruments of transportation or communication, by
means of a prospectus or other written or oral communication, which includes an untrue
statement of a material fact or omits to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they were made, not misleading
(the purchaser not knowing of such untruth or omission), and who shall fail in the burden of
proof that he did not know, and in the exercise of reasonable care could not have known, of
such untruth or omission, shall be liable to the person purchasing such security from him,
who may sue to recover the consideration paid for such security with interest thereon, less
the amount of any income received thereon, upon the tender of such security, or for
damages if he no longer owns the security.
Any person who shall make or cause to be made any statement in any report, or document
filed pursuant to this Code or any rule or regulation thereunder, which statement as at the time and
in the light of the circumstances under which it was made false or misleading with respect to any
material fact, shall be liable to any person who, not knowing that such statement was false or
misleading, and relying upon such statement shall have purchased or sold a security at a price which
was affected by such statement, for damages caused by such reliance, unless the person sued shall
prove that he acted in good faith and had no knowledge that such statement was false or
misleading.391
Civil Liability of Fraud in Connection with Securities Transactions.
Any person who engages in any act or transaction in violation of Sections 19.2,392 20393 or
26,394 or any rule or regulation of the Commission thereunder, shall be liable to any other person
389

Sec. 56
Registration of securities
391
Sec. 57
392
It shall be lawful for any person to make any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made in the light of the circumstances under which they are made,
not mis-leading, or to engaged to any fraudulent, deceptive or manipulative acts or practices, in connection with
any tender offer or request or invitation for tenders, or any solicitation for any security holders in opposition to or
in favor of any such favor of any such offer, request, or invitation. The Commission shall, for the purposes of this
subsection, define and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent,
deceptive and manipulative.
393
On Proxies, supra
390

108

who purchases or sells any security, grants or refuses to grant any proxy, consent or authorization,
or accepts or declines an invitation for tender of a security, as the case may be, for the damages
sustained by such other person as a result of such act or transaction.395

Civil Liability for Manipulation of Security Prices.

Any person who willfully participates in any act or transaction in violation of Section 24396
shall be liable to any person who shall purchase or sell any security at a price which was affected by
such act or transaction, and the person so injured may sue to recover the damages sustained as a
result of such act or transaction.397
Civil Liability with Respect to Commodity Futures Contracts and Pre-need Plans.
Any person who engages in any act or transactions in willful violation of any rule or
regulation promulgated by the Commission under Section 11 398 or 16, 399 which the Commission
denominates at the time of issuance as intended to prohibit fraud in the offer and sale of pre-need
plans or to prohibit fraud, manipulation, fictitious transactions, undue speculation, or other unfair or
abusive practices with respect to commodity future contracts, shall be liable to any other person
sustaining damages as a result of such act or transaction.
As to each such rule or regulation so denominated, the Commission by rule shall prescribe
the elements of proof required for recovery and any limitations on the amount of damages that may
be imposed.400
Civil Liability on Account of Insider Trading.
Any insider who violates Subsection 27.1401 and any person in the case of a tender offer who
violates Subsection 27.4 (a)(i), 402 or any rule or regulation thereunder, by purchasing or selling a
security while in possession of material information not generally available to the public, shall be
394

On Fraudulent transactions, supra

Sec. 58
396
On Manipulation of Security Prices, supra
397
Sec. 59
398
Commodity Futures Contracts. - No person shall offer, sell or enter into commodity futures contracts except in
accordance with the rules, regulations and orders the Commission may prescribe in the public interest. The
Commission shall promulgate rules and regulations involving commodity futures contracts to protect investors to
ensure the development of a fair and transparent commodities market.
399
Pre-Need Plans. No person shall sell or offer for sale to the public any pre-need plan except in accordance with
rules and regulations which the Commission shall prescribe. Such rules shall regulate the sale of pre-need plans by,
among other things, requiring the registration of pre-need plans, licensing persons involved in the sale of pre- need
plans, requiring disclosures to prospective plan holders, prescribing advertising guidelines, providing for uniform
accounting system, reports and recording keeping with respect to such plans, imposing capital, bonding and other
financial responsibility, and establishing trust funds for the payment of benefits under such plans.
400
Sec. 60
401
supra
402
Id.,
395

109

liable in a suit brought by any investor who, contemporaneously with the purchase or sale of
securities that is the subject of the violation, purchased or sold securities of the same class unless
such insider, or such person in the case of a tender offer, proves that such investor knew the
information or would have purchased or sold at the same price regardless of disclosure of the
information to him.
An insider who violates Subsection 27.3403 or any person in the case of a tender offer who
violates Subsection 27.4 (a), 404 or any rule or regulation thereunder, by communicating material
nonpublic information, shall be jointly and severally liable under Subsection 61.1 with, and to the
same extent as, the insider, or person in the case of a tender offer, to whom the communication was
directed and who is liable under Subsection 61.1 by reason of his purchase or sale of a security.405
I. Banking Laws
1. The New Central Bank Act406
a. State policies
1. Maintain a central monetary authority that shall function and operate as an independent
and accountable body corporate in the discharge of its mandated responsibilities concerning money,
banking and credit.
2. The central monetary, while being a government-owned corporation, shall enjoy fiscal and
administrative autonomy.407
b. Creation of the BangkoSentralngPilipinas (BSP)
An independent central monetary authority, which shall be a body corporate known as the
BangkoSentralngPilipinas, hereafter referred to as the BangkoSentral.
The capital of the BangkoSentral shall be Fifty billion pesos (P50,000,000,000), to be fully
subscribed by the Government of the Republic, Ten billion pesos (P10,000,000,000) of which shall
be fully paid for by the Government upon the effectivity of this Act and the balance to be paid for
within a period of two (2) years from the effectivity of this Act in such manner and form as the
Government, through the Secretary of Finance and the Secretary of Budget and Management, may
thereafter determine.408
c. Responsibility and primary objective
Responsibilities:

403

Id.,
Id.,
405
Sec. 61
406
R.A. No. 7653
407
Sec. 1
408
Sec. 2
404

110

1. To provide policy directions in the areas of money, banking, and credit;

2. To supervise bank operations
3. To regulate the operations of finance companies and non-bank financial institutions
performing quasi-banking functions, and similar institutions.409

Primary objectives:
1. To maintain price stability conducive to a balanced and sustainable growth of the
economy.
1. To promote and maintain monetary stability and the convertibility of the peso.
d. Monetary Board - Powers and functions
1. To adopt, alter and use a corporate seal which shall be judicially noticed
2. To enter into contracts
3. To lease, own, sell property
4. To sue and be sued
5. To acquire and hold such assets and incur such liabilities in connection with its operations
or as are essential to the proper conduct of operation
6. To compromise condone or release any claim of or settled liability to the BSP
7. To do and perform such other necessary powers
e. How the BSP handles banks in distress
(1) Conservatorship
Whenever on the basis of a report submitted by the appropriate supervising or examining
department, the Monetary Board finds that a bank or a quasi-bank is in a state of continuing inability
or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of
depositors and creditors; shall appoint a conservator.
(2) Closure
Mandatory requirements for bank closure:
1. Examination by the appropriate BSP department as to the condition of the bank
409

Sec. 3

111

2. Examination shows that the condition of the bank is one of insolvency

3. Director shall inform the MB in writing of such fact
4. MB shall find the statement of the department to be true.410
(3) Receivership
Receivership is equivalent to an injunction to restrain the bank in any way. Thus, the
appointment of a receiver operates to suspend the authority of the bank and of its directors and
officers over its property and effects.411
(4) Liquidation
1. The condition of the bank is one of insolvency or that its continuance would involve
probable loss to its depositors and creditors.
2. A determination by the MB that the bank cannot be rehabilitated.412
410

Banco Filipino v. MB
Villanueva v. CA
Effects of appointment of receiver/ liquidation:
1. Suspension of operation
2. The assets under receivership or liquidation shall be deemed in custodialegis in the hands of the receiver
and shall be exempt from garnishment, levy, attachment or execution (Sec. 30).
3. Bank is not liable to pay interest on deposits during the period of suspension of operation (Overseas Bank v.
CA)
4. The corporation retains its legal personality (Teal Motor Co. v CFI)
5. Deposits do not become preferred credits. (CB v. Morfe)
Grounds:
A. Under NCBA
1. Inability to pay liabilities as they become due in the ordinary course of business, but not including inability
to pay caused by extraordinary demands induced by financial panic in the banking community;
2. Insufficiency of realizable assets to meet its liabilities;
3. Inability to continue business without involving probable losses to its depositors or creditors; or
4. Willful violation of a cease and desist order that has become final, involving acts or transactions which
amount to fraud or a dissipation of the assets of the institution. (Sec. 30)
B. Under GBL
1. Notification to the BSP or public announcement of a bank holiday (Sec. 53, GBL)
2. Suspension of payment of deposit liabilities continuously for more than 30 days (Sec. 53, GBL)
3. Persistence in conducting business in an unsafe or unsound manner. (Sec. 56, GBL)
412
Grounds:
1. The condition of the bank is one of insolvency or that its continuance would involve probable loss to its
depositors and creditors.
2. A determination by the MB that the bank cannot be rehabilitated.
Procedure:
1. Receiver shall file ex parte, with the proper RTC, a petition for assistance in the liquidation of the institution
pursuant to a liquidation plan adopted by the PDIC for general application to all closed banks. In case of quasibanks, the liquidation plan shall be adopted by the Monetary Board.
411

112

f. How the BSP handles exchange crisis

(1) Legal tender power
Legal tender
All notes and coins issued by the BangkoSentral are fully guaranteed by the Republic and shall
be legal tender in the Philippines for all debts, both public and private.413
Legal tender power of coins
1. 25 centavos and above: In amounts not exceeding P50.00
2. 10 centavos or less: In amounts not exceeding P20.00
BSP Authority to Replace
1. Notes for any series or denomination More than 5 years old
2. Coins More than 10 years old414
(2) Rate of exchange
The Monetary Board shall determine:
1. The exchange rate policy of the country;
2. The rates of which the BangkoSentral shall buy and sell spot exchange;
3. Establish deviation limits from the effective exchange rate(s) as it may deem proper; and
4. The rates for other types of foreign exchange transactions by the BangkoSentral including
purchases and sales of foreign notes and coins.
2. Law on Secrecy of Bank Deposits415
2. He shall convert the assets of the institution to money for the purpose of paying the debts of the
institution.(Sec. 30)
3. Payment shall be in accordance with the rules on concurrence and preference of credits
413

Sec. 52
Rules:
1. Notes and coins called in for replacement shall remain legal tender for a period of one year from the date of
call.
2. After that period, they shall cease to be legal tender during the following year or for such longer period as MB
may determine.
3. After the expiration of this latter period, the notes and coins which have not been exchanged shall cease to
be a liability of BSP and shall be demonetized (Sec. 57).
414

415

R.A. No. 1405, as amended

113

a. Purpose
1. To encourage people to deposit in banks
2. To discourage private hoarding so that banks may lend such funds and assist in the
economic development.
b. Prohibited acts
1. Examination and inquiry or looking into all deposits of whatever nature with the banks in
the Philippines including investments in bonds issued by the Government.
2. Any disclosure by any official or employee of any bank to any unauthorized person of any
information concerning the said deposits.
c. Deposits covered
The deposits covered by law are considered as of an absolutely confidential nature and maynotbe
examined, inquired or looked into by any person, governmental, bureau, or office.
d. Exceptions
A. From R.A. No. 1405
1. Upon written permission of the depositor;
2. In cases of impeachment;
3. Upon order of a competent court in cases of bribery or dereliction of duty of public
officials;
4. In cases where the money deposited or invested is the subject matter of the litigation.416
B. From other laws
1. Anti-Graft and Corrupt Practices Act cases417
2. Inquiry by the Commissioner of Internal Revenue into bank deposits of:
a. A decedent to determine his gross estate;
b. A taxpayer who has filed an application for compromise of his tax liability by
reason of financial incapacity to pay his tax liability. He must file a written waiver of his
privilege under RA 1405 or other general or special laws.418
416

Sec. 2
R.A. No. 3019; added by analogy in PNB vs. Gancayco

417

114

3. Inquiry or examination by the Anti-Money Laundering Council (AMLC) of any particular

deposit or investment with any banking institution or non-bank financial institution upon order of
any competent court in cases of violation of the Anti-Money Laundering Law, when it has been
established that there is probable cause that the deposits or investments are related to an unlawful
activity or a money laundering offense, except that no court order shall be required in the following
unlawful activities:
a. Kidnapping for ransom under Art. 267 RPC;
b. Comprehensive Dangerous Drugs Act of 2002;419
c. Hijacking and other violations under RA 6235; destructive arson and murder
under RPC. Including those perpetrated by terrorists against non-combatant persons and
similar targets.420
4. Disclosure to the Treasurer of the Philippines of dormant deposits for at least 10 years
under the Unclaimed Balances Act.421
e. Garnishment of deposits, including foreign deposits
Garnishment of bank deposit of judgment debtor does not violate RA 1405. Its purpose is
merely to secure information as to the name of the depositor and whether or not the defendant had
a deposit in said bank, only for purposes of garnishment.422
f. Penalties for violation
Imprisonment of not more than 5 years or a fine not more than P20,000or both, in the
discretion of the court.

3. General Banking Act423

418

Sec. 6[f], NIRC

R.A. No. 9165
420
Sec. 11, R.A. No. 9160, as amended by Sec. 8 of R.A. No. 9194
421
Act No. 3936
422
China Banking Corporation v. Ortega
423
R.A. No. 8791
419

115

a. Definition and classification of banks

Banks-entities engaged in the lending of funds obtained in the form of deposits.424Entities
duly authorized by the Monetary Board to engage in the business of regularly lending funds obtained
regularly from the public through the receipt of deposits of any kind.
Classification of banks:
1. Universal banks- primarily governed by the General Banking Law (GBL), can exercise the
powers of an investment house and invest in non-allied enterprises and have the highest
capitalization requirement.
2. Commercial banks- ordinary banks governed by the GBL which have a lower
capitalization requirement than universal banks and cannot exercise the powers of an investment
house and invest in non-allied enterprises.
3. Thrift banks these are a) Savings and mortgage banks; b) Stock savings and loan
associations; c) Private development banks, which are primarily governed by the Thrift Banks Act
(R.A. 7906).
4. Rural banks mandated to make needed credit available and readily accessible in the rural
areas on reasonable terms and which are primarily governed by the Rural Banks Act of 1992 (RA
7353).
5. Cooperative banks those banks organized whose majority shares are owned and
controlled by cooperatives primarily to provide financial and credit services to cooperatives. It shall
include cooperative rural banks. They are governed primarily by the Cooperative Code (RA 6938).
6. Islamic banks banks whose business dealings and activities are subject to the basic
principles and rulings of Islamic Sharia, such as the Al Amanah Islamic Investment Bank of the
Philippines which was created by RA 6848.
7. Other classification of banks as determined by the Monetary Board of the
BangkoSentralngPilipinas.425
b. Distinction of banks from quasi-banks and trust entities
Quasi-banks
Entities engaged in the borrowing of funds through the issuance, endorsement or
assignment with recourse or acceptance of deposit substitutes.
Entities authorized to perform universal or commercial banking functions may also engage
in quasi-banking functions.
424

Sec. 2
Sec. 3

425

116

c. Bank powers and liabilities

(1) Corporate powers
1. General/corporate/incidental
2. Necessary (Sec. 29)
3. Other powers (Sec. 55)
(2) Banking and incidental powers
1. Powers necessary to carry on the business banking such as
a. accepting drafts and issuing letters of credit;
b. discounting and negotiating promissory notes, drafts, bills of exchange, and other
evidences of debt;
c. accepting or creating demand deposits
A bank other than a universal or commercial bank cannot accept or create demand deposits
except upon prior approval of, and subject to such conditions and rules as may be prescribed by the
Monetary Board.426
a. receiving other types of deposits and deposit substitutes;
b. buying and selling foreign exchange and gold or silver bullion;
c. acquiring marketable bonds and other debt securities; and
d. extending credit.
2. Powers of an investment house as provided in existing laws and the power to invest in
non-allied enterprises as provided in this Act.
d. Diligence required of banks - relevant jurisprudence
1. The appropriate standard of diligence must be very high, if not the highest, degree of
diligence; highest degree of care.427
426

Sec 22
PCI Bank v. CA, 350 SCRA 446; PBCom v. CA
This applies only to cases where banks are acting in their fiduciary capacity, that is, as depository of the deposits
of their depositors. (Reyes v. CA)
While an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the
mortgagors title, in case of a banking institution, it must exercise due diligence before entering into said contract,
427

117

2. Subject to reasonable regulation under the police power of the state.

e. Nature of bank funds and bank deposits428
1. As debtor-creditor
a. Savings
b. Time
c. Demand429
2. As lessor-lessee
a. Safety deposit boxes
3. As trustee-trustor
a. Trust account
4. Asbailee-bailor
a. Deposit strictly for safekeeping and for specific purposes
5. As agent-principal:
and cannot rely upon what is or is not annotated on the title. Reason: Before a loan is approved, representatives
are sent to the premises offered as collaterals and investigate who the real owners are. (DBP vs. CA, 331 SCRA 267)
The business of a bank is one affected by public interest for which reason the bank should guard against loss due
to negligence and bad faith. It is expected to ascertain and verify the identities of the persons it transacts business
with. (UCPB vs. Ramos, G.R. No. 147800, November 11, 2003, Callejo, J.)
Due diligence required of banks extend even to persons, or institutions like the GSIS, regularly engaged in the
business of lending money secured by real estate mortgages. (GSIS vs. Eduardo Santiago, G.R. No. 155206.
October 28, 2003)
428
Types of deposit accounts
1. Individual
2. Joint
a. And account
- Co-ownership
The signature of both co-depositors are required for withdrawals.
b. And/or account
Either one of the co-depositors may deposit and withdraw from the account without the knowledge,
consent and signature of the other. And upon the death of one, the survivor may withdraw the entire balance on
deposit.(Handbook on Bank Deposits, A. Viray, 1998 ed.)
It may be deemed a survivorship agreement depending on the intention of the parties; aleatory contract
supported by a lawful consideration which is valid unless when made as a mere cloak to hide an inofficious
donation, to transfer property in fraud of creditors, or to defeat the legitime of a forced heir. (Rivera v. Peoples
Bank)
429
Characteristics:
a. In the nature of irregular deposits (Serrano vs. Central Bank, 96 SCRA 96)

118

a. Deposit of check for collection

b. Deposit for specific purpose
c. Deposit for safekeeping
f. Stipulation on interests
Allowed provided it is within the limits or ceiling provided for by the Act.
g. Grant of loans and security requirements
Before granting a loan, a bank must ascertain that the debtor is capable of fulfilling his
commitments to the bank.
Rules:
1. A bank may demand from its applicants a statement of their assets and liabilities and of
their income and expenditures and other information.
2. Should such statements prove to be false or incorrect, the bank may terminate any loan
granted on the basis of said statements and shall have the right to demand immediate repayment or
liquidation of obligation.430
(1) Ratio of net worth to total risk assets
Risk-based capital
The minimum ratio prescribed by the Monetary Board which the net worth of a bank must
bear to its total risk assets which may include contingent accounts.
However, the Monetary Board may require or suspend compliance with such ratio whenever
necessary for a maximum period of one year; that such ratio shall be applied uniformly to banks of
the same category.431
(2) Single borrowers limit
1. The total amount of loans extended by a bank to any person, partnership, association,
corporation or other entity shall at no time exceed 20% of the net worth of such bank.
430

Sec. 40
Sec. 34
Effect of non-compliance with the prescribed minimum ratio:
1. Distribution of net profits may be limited or prohibited and MB may require that part or all of the net profits
be used to increase the capital accounts of the bank until the minimum requirement has been met; or
2. Acquisition of major assets and making of new investments may be restricted, except: purchases of evidence
of indebtedness guaranteed by the Government (Sec. 34).
3. In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program approved
by BSP, the MB may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations
under rehabilitation from full compliance with the required capital ratio.
431

119

2. The total amount of loans may be increased by additional 10% of the net worth of such
bank provided the additional liabilities of any borrower are adequately secured by trust receipts,
shipping documents, warehouse receipts or other similar documents transferring or securing title
covering readily marketable, non-perishable goods which must be fully covered by insurance.432
(3) Restrictions on bank exposure to DOSRI (directors, officers,
stockholders and their related interests)433
432

The prescribed ceiling shall include:

The direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a
general endorser, drawer or guarantor who obtains a loan or other credit accommodation from or discount paper
with or sells paper to such banks;
a. In the case of an individual who owns or controls a majority interest in a corporation,
b. partnership, association or any other entity, the liabilities of the said entities to the bank;
c. In a case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or
controls a majority interest; and
d. In the case of a partnership, association, or other entity, the liabilities of the member thereof to such bank.
Exclusions from the limits:
a. Loans secured by obligations of the BangkoSentral or the Philippine Government;
b. Loans fully guaranteed by the government;
c. Loans covered by assignment of deposits maintained in the lending bank and held in the Philippines;
d. Loans, credit accommodations and acceptances under letters of credit to the extent covered by margin
deposits; and
e. Other loans or credit accommodations which the MB may specify as non-risk items.
433
Who are covered (BSP Circular No. 170):
1. Directors Directors of the lending bank
2. Officers Either identified in the by-laws or are generally known as such
3. Stockholders those whose stockholdings, individually and/or together with any of the following persons,
amount to 2% or more of the total subscribed capital stock of the bank:
a. His spouse or relative within the first degree of affinity/consanguinity or relative by legal adoption.
b. A partnership in which the stockholder or his spouse or any of his relatives mentioned above is a general
partner.
c. A co-owner with the stockholder or the stockholders spouse or relative mentioned above of
property/right/interest (mortgaged, pledged or assigned to secure the loan or credit accommodations, except
when the mortgage, pledge or assignment covers only said co-owners undivided interest.
4. Related Interest
a. Spouse, relatives within first degree of consanguinity or affinity, or relative by legal adoption of a DOS.
b. Partnerships of which a DOS or his spouse or relative within the first degree of consanguinity or affinity, or
relative by legal adoption, is a general partner.
c. Co-owner with the DOS or his spouse or relative within the first degree of consanguinity or affinity, or
relative by legal adoption, of the property/interest/ right mortgaged, pledged, assigned to secure the loans or
credit accommodations, except when the mortgage, pledge or assignment covers only said co-owners undivided
interest.
d. Corporation with inter-locking directors.
e. Corporation wherein 20% of the capital stock is owned by the DOS and/or their spouses or relatives
mentioned above.
f. Corporation wholly or majority owned or controlled by any related entity or a group of related entities in
items (b), (d), and (e).
Requisites:
a. The borrower is director, officer, or any stockholder of a bank and related interest.
b. He contracts a loan or any form of financial accommodation

120

a. No director or officer of any bank shall, directly or indirectly, borrow from such bank nor
shall be guarantor, endorser or surety for loans from such bank to others, or in any manner be
obligor or incur any contractual liability to the bank, except with the written approval of the majority
of all the directors of the bank, excluding the director concerned. The written approval shall not be
required for loans granted to officers under a fringe benefit plan approved by the BangkoSentral.
b. Dealings of a bank with any of its DOSRI shall be upon terms not less favorable to the
bank than those offered to others.434
c. Loans extended to DOSRI shall be limited to an amount equivalent to their respective
unencumbered deposits and book value of their paid-in capital contribution in the bank.435
d. The resolution approving the loan shall be entered in the records of the bank and
transmitted to the BSP
e. Waiver of secrecy of deposits of whatever nature in all banks in the Philippines by the
borrower. No waiver is required if the related interests are the borrower
f. Information obtained from examination is strictly confidential.
h. Penalties for violations
(1) Fine, imprisonment
Shall be subject to Sections 34, 35, 36 and 37436 of the New Central Bank Act.437
c. The loan or financial accommodation is from (1) his bank or (2) a bank that is a subsidiary of a bank holding
company of which both his bank and lending bank are subsidiaries, (3) a bank in which a controlling proportion of
the shares is owned by the same interest that owns a controlling proportion of the shares of his bank; and
d. The loan or financial accommodation of the DOS, singly or with that of his related interest, is in excess of 5%
of the capital and surplus of the lending bank or in the maximum amount permitted by law, whichever is
lower.(BSP Circular No. 170)
434
Arms length rule
435
Except
i. Loans, credit accommodations, and guarantees secured by assets considered as non-risk by the Monetary Board.
ii. Loans, credit accommodations, and advances to officers in the form of fringe benefits.
iii. Cooperative bank with regard to its cooperative shareholders
436
Section 34.Refusal to Make Reports or Permit Examination. - Any officer, owner, agent, manager, director or
officer-in-charge of any institution subject to the supervision or examination by the BangkoSentral within the
purview of this Act who, being required in writing by the Monetary Board or by the head of the supervising and
examining department willfully refuses to file the required report or permit any lawful examination into the affairs
of such institution shall be punished by a fine of not less than Fifty thousand pesos (P50,000) nor more than One
hundred thousand pesos (P100,000) or by imprisonment of not less than one (1) year nor more than five (5) years,
or both, in the discretion of the court.
Section 35.False Statement. - The willful making of a false or misleading statement on a material fact to the
Monetary Board or to the examiners of the BangkoSentral shall be punished by a fine of not less than One hundred
thousand pesos (P100,000) nor more than Two hundred thousand pesos (P200,000), or by imprisonment of not
more than (5) years, or both, at the discretion of the court.
Section 36. Proceedings Upon Violation of This Act and Other Banking Laws, Rules, Regulations, Orders or
Instructions. - Whenever a bank or quasi-bank, or whenever any person or entity willfully violates this Act or other
pertinent banking laws being enforced or implemented by the BangkoSentral or any order, instruction, rule or

121

regulation issued by the Monetary Board, the person or persons responsible for such violation shall unless
otherwise provided in this Act be punished by a fine of not less than Fifty thousand pesos (P50,000) nor more than
Two hundred thousand pesos (P200,000) or by imprisonment of not less than two (2) years nor more than ten (10)
years, or both, at the discretion of the court.
Whenever a bank or quasi-bank persists in carrying on its business in an unlawful or unsafe manner, the Board
may, without prejudice to the penalties provided in the preceding paragraph of this section and the administrative
sanctions provided in Section 37 of this Act, take action under Section 30 of this Act.
Section 37.Administrative Sanctions on Banks and Quasi-banks. - Without prejudice to the criminal sanctions
against the culpable persons provided in Sections 34, 35, and 36 of this Act, the Monetary Board may, at its
discretion, impose upon any bank or quasi-bank, their directors and/or officers, for any willful violation of its
charter or by-laws, willful delay in the submission of reports or publications thereof as required by law, rules and
regulations; any refusal to permit examination into the affairs of the institution; any willful making of a false or
misleading statement to the Board or the appropriate supervising and examining department or its examiners; any
willful failure or refusal to comply with, or violation of, any banking law or any order, instruction or regulation
issued by the Monetary Board, or any order, instruction or ruling by the Governor; or any commission of
irregularities, and/or conducting business in an unsafe or unsound manner as may be determined by the Monetary
Board, the following administrative sanctions, whenever applicable:
(a) fines in amounts as may be determined by the Monetary Board to be appropriate, but in no case to exceed
Thirty thousand pesos (P30,000) a day for each violation, taking into consideration the attendant circumstances,
such as the nature and gravity of the violation or irregularity and the size of the bank or quasi-bank;
(b) suspension of rediscounting privileges or access to BangkoSentralcredit facilities;
(c) suspension of lending or foreign exchange operations or authority to accept new deposits or make new
investments;
(d) suspension of interbank clearing privileges; and/or
(e) revocation of quasi-banking license.
Resignation or termination from office shall not exempt such director or officer from administrative or criminal
sanctions.
The Monetary Board may, whenever warranted by circumstances, preventively suspend any director or officer
of a bank or quasi-bank pending an investigation: Provided, That should the case be not finally decided by the
BangkoSentral within a period of one hundred twenty (120) days after the date of suspension, said director or
officer shall be reinstated in his position: Provided, further, That when the delay in the disposition of the case is
due to the fault, negligence or petition of the director or officer, the period of delay shall not be counted in
computing the period of suspension herein provided.
The above administrative sanctions need not be applied in the order of their severity.
Whether or not there is an administrative proceeding, if the institution and/or the directors and/or officers
concerned continue with or otherwise persist in the commission of the indicated practice or violation, the
Monetary Board may issue an order requiring the institution and/or the directors and/or officers concerned to
cease and desist from the indicated practice or violation, and may further order that immediate action be taken to
correct the conditions resulting from such practice or violation. The cease and desist order shall be immediately
effective upon service on the respondents.
The respondents shall be afforded an opportunity to defend their action in a hearing before the Monetary
Board or any committee chaired by any Monetary Board member created for the purpose, upon request made by
the respondents within five (5) days from their receipt of the order. If no such hearing is requested within said
period, the order shall be final. If a hearing is conducted, all issues shall be determined on the basis of records,
after which the Monetary Board may either reconsider or make final its order.
The Governor is hereby authorized, at his discretion, to impose upon banking institutions, for any failure to
comply with the requirements of law, Monetary Board regulations and policies, and/or instructions issued by the
Monetary Board or by the Governor, fines not in excess of Ten thousand pesos (P10,000) a day for each violation,
the imposition of which shall be final and executory until reversed, modified or lifted by the Monetary Board on
appeal.
437
Sec. 66

122

(2) Suspension or removal of director or officer

If the offender is a director or officer of a bank, quasi-bank or trust entity, the Monetary
Board may also suspend or remove such director or officer.
(3) Dissolution of bank
If the violation is committed by a corporation, such corporation may be dissolved by quo
warranto proceedings instituted by the Solicitor General.
4. Philippine Deposit Insurance Corporation Act438
a. Basic policy
To insure the deposits of all banks which are entitled to the benefits of insurance under this
Act.
To promote and safeguard the interests of the depositing public by way of providing
permanent and continuing insurance coverage on all insured deposits.
b. Concept of insured deposits
The term "insured deposit" means the amount due to any bona fide depositor for legitimate
deposits in an insured bank net of any obligation of the depositor to the insured bank as of date of
closure, but not to exceed Five hundred thousand pesos (P500,000.00). In determining such amount
due to any depositor, there shall be added together all deposits in the bank maintained in the same
right and capacity for his benefits either in his own name or in the name of others.439
c. Liability to depositors
(1) Deposit liabilities required to be insured with PDIC
The deposit liabilities of any bank engaged in the business receiving deposits are required to
be insured with the PDIC.440
(2) Commencement of liability
Liability commences when an insured bank is closed by the Monetary Board pursuant to Sec
30441 of R.A. 7653.

438

R.A. No. 3591, as amended

Sec. 3 (g), R.A. 9576 (April 29, 2009), amending Sec. 4 (g), R.A. 3591
440
Sec. 4
441
Proceedings in Receivership and Liquidation. - Whenever, upon report of the head of the supervising or
examining department, the Monetary Board finds that a bank or quasi-bank:
439

123

(3) Deposit accounts not entitled to payment

a) Investment products such as bonds and securities, trust accounts, and other similar
instruments;
b) Deposit accounts or transactions which are unfunded, or that are fictitious or fraudulent;
(a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall
not include inability to pay caused by extraordinary demands induced by financial panic in the banking community;
(b) has insufficient realizable assets, as determined by the BangkoSentral, to meet its liabilities; or
(c) cannot continue in business without involving probable losses to its depositors or creditors; or
(d) has willfully violated a cease and desist order under Section 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation of the assets of the institution; in which cases, the Monetary
Board may summarily and without need for prior hearing forbid the institution from doing business in the
Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking institution.
For a quasi-bank, any person of recognized competence in banking or finance may be designed as receiver.
The receiver shall immediately gather and take charge of all the assets and liabilities of the institution,
administer the same for the benefit of its creditors, and exercise the general powers of a receiver under the
Revised Rules of Court but shall not, with the exception of administrative expenditures, pay or commit any act that
will involve the transfer or disposition of any asset of the institution: Provided, That the receiver may deposit or
place the funds of the institution in non-speculative investments. The receiver shall determine as soon as possible,
but not later than ninety (90) days from takeover, whether the institution may be rehabilitated or otherwise
placed in such a condition so that it may be permitted to resume business with safety to its depositors and
creditors and the general public: Provided, That any determination for the resumption of business of the
institution shall be subject to prior approval of the Monetary Board.
If the receiver determines that the institution cannot be rehabilitated or permitted to resume business in
accordance with the next preceding paragraph, the Monetary Board shall notify in writing the board of directors of
its findings and direct the receiver to proceed with the liquidation of the institution. The receiver shall:
(1) file ex parte with the proper regional trial court, and without requirement of prior notice or any other action,
a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the
Philippine Deposit Insurance Corporation for general application to all closed banks. In case of quasi-banks, the
liquidation plan shall be adopted by the Monetary Board. Upon acquiring jurisdiction, the court shall, upon motion
by the receiver after due notice, adjudicate disputed claims against the institution, assist the enforcement of
individual liabilities of the stockholders, directors and officers, and decide on other issues as may be material to
implement the liquidation plan adopted. The receiver shall pay the cost of the proceedings from the assets of the
institution.
(2) convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the
purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of
credit under the Civil Code of the Philippines and he may, in the name of the institution, and with the assistance of
counsel as he may retain, institute such actions as may be necessary to collect and recover accounts and assets of,
or defend any action against, the institution. The assets of an institution under receivership or liquidation shall be
deemed in custodialegis in the hands of the receiver and shall, from the moment the institution was placed under
such receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution.
The actions of the Monetary Board taken under this section or under Section 29 of this Act shall be final and
executory, and may not be restrained or set aside by the court except on petition for certiorari on the ground that
the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess
of jurisdiction. The petition for certiorari may only be filed by the stockholders of record representing the majority
of the capital stock within ten (10) days from receipt by the board of directors of the institution of the order
directing receivership, liquidation or conservatorship.
The designation of a conservator under Section 29 of this Act or the appointment of a receiver under this
section shall be vested exclusively with the Monetary Board. Furthermore, the designation of a conservator is not a
precondition to the designation of a receiver.

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c) Deposit accounts or transactions constituting, and/or emanating from, unsafe and

unsound banking practice/s, as determined by the Corporation, in consultation with the BSP, after
due notice and hearing, and publication of a cease and desist order issued by the Corporation against
such deposit accounts or transactions; and
d) Deposits that are determined to be the proceeds of an unlawful activity as defined under
Republic Act No. 9160, as amended.442
(4) Extent of liability
Liability covers the amount due to any depositor for deposits in an insured bank net of any
obligation of the depositor to the insured bank as of the date of closure, but not to exceed
P500,000.00.443
(5) Determination of insured deposits
The Corporation shall commence the determination of insured deposits upon its actual
takeover of the closed bank.
In order that a claim for deposit insurance with the PDIC may prosper, the law requires that
a corresponding deposit be placed in the insured bank. A deposit as defined in Section 3(f), may be
constituted only if money or the equivalent of money is received by a bank.
(6) Calculation of liability
(a) Per depositor, per capacity rule
The PDICs liability is up to P500,0000 per depositor / per capacity.444
(b) Joint accounts
A joint account regardless of whether the conjunction and, or or and/or is used, shall
be insured separately from an individually-owned deposit account.
If the account is held jointly by two or more natural persons, or by two or more juridical
persons or entities, the maximum insured deposit shall be divided into as many equal shares as there
are individuals, juridical persons or entities, unless a different sharing is stipulated in the document
of deposit.
Document of deposit referred to in the preceding paragraph pertains to joint account
agreements, account ledgers, certificate of time deposits, passbooks or other evidence of deposits,
specimen signature cards, corporate resolutions, contracts or similar instruments, copies of which
must be in the custody or possession of the bank upon takeover by PDIC.
442

Sec. 4 (f)
Under R.A. No. 9576
444
Ibid.
443

125

If the account is held by a juridical person or entity jointly with one or more natural persons,
the maximum insured deposit shall be presumed to belong entirely to the juridical person or entity.
The aggregate of the interests or total share of each co-owner over several joint accounts,
whether owned by the same or different combinations of individuals, juridical persons or entities,
shall likewise be subject to the maximum insured deposit of P500,000.00.
The amount of insurance due to any depositor for deposits in an insured bank shall be net of
any matured or unmatured obligation of the depositor to the insured bank as of date of closure. In
case of joint deposit accounts where only one of the co-depositors has an obligation to the closed
bank, the following shall apply:
Where the deposit is a joint and/or or or account which is covered by a hold-out
agreement, the obligation secured by the hold-out agreement shall be deducted from
the balance of the joint account, regardless of the fact that only one of the codepositors in the joint account is indebted to the closed bank.
b) When the deposit is a joint and account which is covered by a hold-out agreement,
the obligation secured by the hold-out agreement shall be deducted only from the
share in the joint account of the depositor who is indebted to the closed bank, unless
his co-depositor is himself a co-signatory to the hold-out agreement.
c) Where the deposit is either a joint and, or or and/or account which is not
covered by a hold-out agreement, the obligation of the depositor who is indebted to the
closed bank shall be deducted only from his share in the balance of the joint deposit
account
a)

(c) Mode of payment

a. Cash
b. Transferred deposit A deposit in an insured bank made available to a depositor by the
PDIC as payment of the insured deposit of such depositor in a closed bank and assumed by
another insured bank.
(d) Effect of payment of insured deposit
1. PDIC is discharged from obligations
Payment of an insured deposit to any person by the Corporation shall discharge the
Corporation
Payment of a transferred deposit by the new bank or by an insuredbank in which a
transferred deposit has been made available shalldischarge the Corporation and such new bank or
other insured bank
2. PDIC is subrogated to depositors rights

126

The Corporation, upon payment of any depositor shall be subrogated to all rights of the
depositor against the closed bank. But the depositor shall retain his claim for any uninsured portion
of his deposit.
All payments by the Corporation of insured deposits in closed banks partake of the nature of
public funds, and must be considered a preferred credit similar to taxes due to the National
Government.
(e) Payments of insured deposits as preferred credit under
Art. 2244, Civil Code
All payments by the Corporation of insured deposits in closed banks partake of the nature of
public funds, and as such, must be considered a preferred credit similar to taxes due to the National
Government in the order of preference under Article 2244 of the New Civil Code. This preference
shall be effective upon liquidation proceedings where no distribution of assets have been made.445
(f) Failure to settle claim of insured depositor
Failure to settle the claim, within 6 months from the date of filing of claim for insured
deposit, where such failure was due to grave abuse of discretion, gross negligence, bad faith, or
malice, shall subject the directors, officers or employees responsible to imprisonment from 6
months to 1 year.
The period shall notapply if the validity of the claim requires the resolution of issues offacts
and or law by another office, body or agency.
(g) Failure of depositor to claim insured deposits
Unless otherwise waived by the Corporation, if the depositor in the closed bank shall fail to
claim his insured deposits with the Corporation
i. within 2 years from actual takeover of the closed bank by the receiver, or
ii. within 2 years after the two-year period to file a claim, all rights of the depositor against
the Corporation shall be barred.
However, all rights of the depositor against the closed bank and its shareholders or the
receivership estate to which the Corporation may have become subrogated, shall revert to the
depositor.446
i. Examination of banks and deposit accounts
The Corporation shall have the power:
xxx
To conduct examination of banks with prior approval of the Monetary Board: Provided,
That no examination can be conducted within twelve (12) months from the last examination date:
445

rd

Sec. 15, 3 par.

Sec. 16 (e)

446

127

Provided, however, That the Corporation may, in coordination with the BangkoSentral, conduct a
special examination as the Board of Directors, by an affirmative vote of a majority of all of its
members, if there is a threatened or impending closure of a bank; Provided, further, That,
notwithstanding the provisions of Republic Act No. 1405, as amended, Republic Act No. 6426, as
amended, Republic Act No. 8791, and other laws, the Corporation and/or the BangkoSentral, may
inquire into or examine deposit accounts and all information related thereto in case there is a
finding of unsafe or unsound banking practice; Provided, finally, That to avoid overlapping of
efforts, the examination shall maximize the efficient use of the relevant reports, information, and
findings of the BangkoSentral, which it shall make available to the Corporation.447
ii. Prohibition against splitting of deposits448
The penalty of prision mayor or a fine of not less than P50,000 but not more than P2,000,000
or both shall be imposed upon any director, officer, employee or agent of a bank for :
xxx
5) splitting of deposits or creation of fictitious loans or deposit accounts.
xxx
iii.Prohibition against issuances of TROs, etc.
No court, except the Court of Appeals, shall issue any temporary restraining order,
preliminary injunction or preliminary mandatory injunction against the Corporation for any action
under this Act.
This prohibition shall apply in all cases, disputes or controversies instituted by a private
party, the insured bank, or any shareholder of the insured bank.
The Supreme Court may issue a restraining order or injunction when the matter is of
extreme urgency involving a constitutional issue, such that unless a temporary restraining order is
issued, grave injustice and irreparable injury will arise. The party applying for the issuance of a
restraining order or injunction shall file a bond in an amount to be fixed by the Supreme Court,
which bond shall accrue in favor of the Corporation if the court should finally decide that the
applicant was not entitled to the relief sought.449
J. Intellectual Property Law
1. Intellectual Property Rights in general
a. Intellectual property rights
447

th

Sec. 8, 8 par., as amended by R.A. 9302, 12 August 2004, R.A. 9576, April 29, 2009
Splitting of deposits occurs whenever a deposit account with an outstanding balance of more than the statutory
maximum amount of insured deposit maintained under the name of natural or juridical persons is broken down
and transferred into two (2) or more accounts in the name/s of natural or juridical persons or entities who have no
beneficial ownership on transferred deposits in their names within one hundred twenty (120) days immediately
preceding or during a bank- declared bank holiday, or immediately preceding a closure order issued by the
Monetary Board of the BangkoSentralngPilipinas for the purpose of availing of the maximum deposit insurance
coverage; (As added by R.A. 9302, 12 August 2004; as amended by R.A. 9576, June 1, 2009)
449
Sec. 22
448

128

The term "intellectual property rights" consists of:

1.
2.
3.
4.
5.
6.
7.

Copyright and Related Rights;

Trademarks and Service Marks;
Geographic Indications;
Industrial Designs;
Patents;
Layout-Designs450 of Integrated Circuits; and
Protection of Undisclosed Information451
b. Differences between copyrights, trademarks and patent

Trademark, copyright and patents are different intellectual property rights that cannot be
interchanged with one another. A trademark is any visible sign capable of distinguishing the goods 452
or services453 of an enterprise and shall include a stamped or marked container of goods.
In relation thereto, a trade name means the name or designation identifying or distinguishing
an enterprise. Meanwhile, the scope of a copyright is confined to literary and artistic works which
are original intellectual creations in the literary and artistic domain protected from the moment of
their creation. Patentable inventions, on the other hand, refer to any technical solution of a problem
in any field of human activity which is new, involves an inventive step and is industrially
applicable.454
c. Technology transfer arrangements
Refers to contracts or agreements involving the transfer of systematic knowledge for the
manufacture of a product, the application of a process, or rendering of a service including
management contracts; and the transfer, assignment or licensing of all forms of intellectual property
rights, including licensing of computer software except computer software developed for mass
market.
2. Patents
a. Patentable inventions
Any technical solution of a problem in any field of human activity which is new, involves an
inventive step and is industrially applicable shall be patentable. It may be, or may relate to, a product,
or process, or an improvement of any of the foregoing.455
b. Non-patentable inventions
450

Topographies
Sec. 4.1
452
trademark
453
service mark
454
Kho v. CA, et al., 379 SCRA 410 [2002]
455
Sec. 21
451

129

The following shall be excluded from patent protection:

1. Discoveries, scientific theories and mathematical methods;
2. Schemes, rules and methods of performing mental acts, playing games or doing business,
and programs for computers;
3. Methods for treatment of the human or animal body by surgery or therapy and diagnostic
methods practiced on the human or animal body. This provision shall not apply to products and
composition for use in any of these methods;
4. Plant varieties or animal breeds or essentially biological process for the production of
plants or animals. This provision shall not apply to micro-organisms and non-biological and
microbiological processes.
Provisions under this subsection shall not preclude Congress to consider the enactment of a
law providing sui generis protection of plant varieties and animal breeds and a system of community
intellectual rights protection.
5. Aesthetic creations; and
6. Anything which is contrary to public order or morality.456
c. Ownership of a patent
(1) Right to a patent
The right to a patent belongs to the inventor, his heirs, or assigns. When two (2) or more
persons have jointly made an invention, the right to a patent shall belong to them jointly.457
(2) First-to-file rule
If two (2) or more persons have made the invention separately and independently of each
other, the right to the patent shall belong to the person who filed an application for such invention,
or where two or more applications are filed for the same invention, to the applicant who has the
earliest filing date or, the earliest priority date.458
(3) Inventions created pursuant to a Commission
The person who commissions the work shall own the patent, unless otherwise provided in
the contract.

456

Sec. 22
Sec. 28
458
Sec. 29
457

130

In case the employee made the invention in the course of his employment contract, the
patent shall belong to:
(a) The employee, if the inventive activity is not a part of his regular duties even if the
employee uses the time, facilities and materials of the employer.
(b) The employer, if the invention is the result of the performance of his regularly-assigned
duties, unless there is an agreement, express or implied, to the contrary.459
(4) Right of priority
An application for patent filed by any person who has previously applied for the same
invention in another country which by treaty, convention, or law affords similar privileges to
Filipino citizens, shall be considered as filed as of the date of filing the foreign application: Provided,
That: (a) the local application expressly claims priority; (b) it is filed within twelve (12) months from
the date the earliest foreign application was filed; and (c) a certified copy of the foreign application
together with an English translation is filed within six (6) months from the date of filing in the
Philippines.460
d. Grounds for cancellation of a patent
Any interested person may, upon payment of the required fee, petition to cancel the patent
or any claim thereof, or parts of the claim, on any of the following grounds:
(a) That what is claimed as the invention is not new or patentable;
(b) That the patent does not disclose the invention in a manner sufficiently clear and
complete for it to be carried out by any person skilled in the art; or
(c) That the patent is contrary to public order or morality.
Where the grounds for cancellation relate to some of the claims or parts of the claim,
cancellation may be effected to such extent only.461
e. Remedy of the true and actual inventor
Such person may, within three (3) months after the decision has become final:
(a) Prosecute the application as his own application in place of the applicant;
(b) File a new patent application in respect of the same invention;
(c) Request that the application be refused; or
459

Sec. 30
Sec. 31
461
Sec. 61
460

131

(d) Seek cancellation of the patent, if one has already been issued.462
f. Rights conferred by a patent
A patent shall confer on its owner the following exclusive rights:
(a) Where the subject matter of a patent is a product, to restrain, prohibit and prevent any
unauthorized person or entity from making, using, offering for sale, selling or importing that
product;
(b) Where the subject matter of a patent is a process, to restrain, prevent or prohibit any
unauthorized person or entity from using the process, and from manufacturing, dealing in, using,
selling or offering for sale, or importing any product obtained directly or indirectly from such
process.
Patent owners shall also have the right to assign, or transfer by succession the patent, and to
conclude licensing contracts for the same.463
g. Limitations of patent rights
The owner of a patent has no right to prevent third parties from performing, without his
authorization, the acts referred to in Section 71 hereof in the following circumstances:
Using a patented product which has been put on the market in the Philippines by the owner
of the product, or with his express consent, insofar as such use is performed after that product has
been so put on the said market;
Where the act is done privately and on a non-commercial scale or for a non-commercial
purpose: Provided, That it does not significantly prejudice the economic interests of the owner of the
patent;
Where the act consists of making or using exclusively for the purpose of experiments that
relate to the subject matter of the patented invention;
Where the act consists of the preparation for individual cases, in a pharmacy or by a medical
professional, of a medicine in accordance with a medical prescription or acts concerning the
medicine so prepared;
Where the invention is used in any ship, vessel, aircraft, or land vehicle of any other country
entering the territory of the Philippines temporarily or accidentally: Provided,That such invention is
used exclusively for the needs of the ship, vessel, aircraft, or land vehicle and not used for the
manufacturing of anything to be sold within the Philippines.464

462

Sec. 67
Sec. 71
464
Sec. 72
463

132

(1) Prior user

Notwithstanding Section 72 hereof, any prior user, who, in good faith was using the
invention or has undertaken serious preparations to use the invention in his enterprise or business,
before the filing date or priority date of the application on which a patent is granted, shall have the
right to continue the use thereof as envisaged in such preparations within the territory where the
patent produces its effect.
The right of the prior user may only be transferred or assigned together with his enterprise
or business, or with that part of his enterprise or business in which the use or preparations for use
have been made.465
(2) Use by the government
A Government agency or third person authorized by the Government may exploit the
invention even without agreement of the patent owner where:
(a) the public interest, in particular, national security, nutrition, health or the development
of other sectors, as determined by the appropriate agency of the government, so
requires; or
(b) A judicial or administrative body has determined that the manner of exploitation, by the
owner of the patent or his licensee, is anti-competitive.
The use by the Government, or third person authorized by the Government shall be subject,
mutatis mutandis, to the conditions set forth in Sections 95 to 97 and 100 to 102.
h. Patent infringement466
1) Tests in patent infringement
(a) Literal infringement
In using literal infringement as a test, resort must be had in the first instance to the words of
the claim. To determine whether the particular item falls within the literal meaning of the patent
claims, the court must juxtapose the claims of the patent and the accused product within the overall
context of the claims and specifications, to determine whether there is exact identity of all material
elements.467
465

Sec. 73
Only the patentee or his successor-in-interest may file an action for infringement. Moreover, there can be no
infringement of a patent until a patent has been issued, since whatever right one has to the invention covered by
the patent arises alone from the grant of patent. In short, a person or entity who has not been granted letter of
patent over an invention and has not acquired any rights or title thereto either as an assignee or a licensee, has no
cause of action for infringement because the right to maintain an infringement suit depends upon the existence of
a patent. (Creser Precision Systems, Inc. v. CA, et al., 286 SCRA 13 [1998])
467
Godines v. CA, 226 SCRA 576 [1993]
466

133

(b) Doctrine of equivalents

Under this doctrine, an infringement also occurs when a device appropriates a prior
invention by incorporating its innovative concept and, albeit with some modification and change,
performs substantially the same function in substantially the same way to achieve substantially the
same result.468
(2) Civil and criminal action
1. Civil Action
The making, using, offering for sale, selling, or importing a patented product or a product
obtained directly or indirectly from a patented process, or the use of a patented process without the
authorization of the patentee constitutes patent infringement.
Any patentee, or anyone possessing any right, title or interest in and to the patented
invention, whose rights have been infringed, may bring a civil action before a court of competent
jurisdiction, to recover from the infringer such damages sustained thereby, plus attorneys fees and
other expenses of litigation, and to secure an injunction for the protection of his rights.
If the damages are inadequate or cannot be readily ascertained with reasonable certainty, the
court may award by way of damages a sum equivalent to reasonable royalty.
The court may, according to the circumstances of the case, award damages in a sum above
the amount found as actual damages sustained: Provided,That the award does not exceed three (3)
times the amount of such actual damages.
The court may, in its discretion, order that the infringing goods, materials and implements
predominantly used in the infringement be disposed of outside the channels of commerce or
destroyed, without compensation.
Anyone who actively induces the infringement of a patent or provides the infringer with a
component of a patented product or of a product produced because of a patented process knowing
it to be especially adopted for infringing the patented invention and not suitable for substantial noninfringing use shall be liable as a contributory infringer and shall be jointly and severally liable with
the infringer.469
2. Criminal Action
If infringement is repeated by the infringer or by anyone in connivance with him after
finality of the judgment of the court against the infringer, the offenders shall, without prejudice to
the institution of a civil action for damages, be criminally liable therefor and, upon conviction, shall
suffer imprisonment for the period of not less than six (6) months but not more than three (3) years
and/or a fine of not less than One hundred thousand pesos (P100,000) but not more than Three
468
469

Ibid.
Sec. 76

134

hundred thousand pesos (P300,000), at the discretion of the court. The criminal action herein
provided shall prescribe in three (3) years from date of the commission of the crime.470
(3) Prescriptive period
No damages can be recovered for acts of infringement committed more than four (4) years
before the institution of the action for infringement.471
(4) Defenses in action for infringement
In an action for infringement, the defendant, in addition to other defenses available to him,
may show the invalidity of the patent, or any claim thereof, on any of the grounds on which a
petition of cancellation can be brought under Section 61472 hereof.473
i. Licensing
(1) Voluntary
To encourage the transfer and dissemination of technology, prevent or control practices and
conditions that may in particular cases constitute an abuse of intellectual property rights having an
adverse effect on competition and trade, all technology transfer arrangements shall comply with the
provisions of this Chapter.474
The following provisions shall be included in voluntary license contracts:
That the laws of the Philippines shall govern the interpretation of the same and in the event
of litigation, the venue shall be the proper court in the place where the licensee has its principal
office;
Continued access to improvements in techniques and processes related to the technology
shall be made available during the period of the technology transfer arrangement;
In the event the technology transfer arrangement shall provide for arbitration, the Procedure
of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United
Nations Commission on International Trade Law (UNCITRAL) or the Rules of Conciliation and
470

Sec. 84
Sec. 79
472
Any interested person may, upon payment of the required fee, petition to cancel the patent or any claim
thereof, or parts of the claim, on any of the following grounds:
(a) That what is claimed as the invention is not new or Patentable;
(b) That the patent does not disclose the invention in a manner sufficiently clear and complete for it to be
carried out by any person skilled in the art; or
(c) That the patent is contrary to public order or morality.
Where the grounds for cancellation relate to some of the claims or parts of the claim, cancellation may be
effected to such extent only.
473
Sec. 81
474
Sec. 85.
471

135

Arbitration of the International Chamber of Commerce (ICC) shall apply and the venue of
arbitration shall be the Philippines or any neutral country; and
The Philippine taxes on all payments relating to the technology transfer arrangement shall be
borne by the licensor.475
(2) Compulsory
If the invention protected by a patent, hereafter referred to as the "second patent," within
the country cannot be worked without infringing another patent, hereafter referred to as the "first
patent," granted on a prior application or benefiting from an earlier priority, a compulsory license
may be granted to the owner of the second patent to the extent necessary for the working of his
invention, subject to the following conditions:
1. The invention claimed in the second patent involves an important technical advance of
considerable economic significance in relation to the first patent;
2. The owner of the first patent shall be entitled to a cross-license on reasonable terms to use
the invention claimed in the second patent;
3. The use authorized in respect of the first patent shall be non-assignable except with the
assignment of the second patent; and
4. The terms and conditions of Sections 95, 96 and 98 to 100 of this Act.476
j. Assignment and transmission of rights
An assignment may be of the entire right, title or interest in and to the patent and the
invention covered thereby, or of an undivided share of the entire patent and invention, in which
event the parties become joint owners thereof. An assignment may be limited to a specified
territory.477
The assignment must be in writing, acknowledged before a notary public or other officer
authorized to administer oath or perform notarial acts, and certified under the hand and official seal
of the notary or such other officer.478

3. Trademarks
a. Definitions of marks, collective marks, trade names

475

Sec. 88
Sec. 97
477
Sec. 104
478
Sec. 105; Sec. 52, id.
476

136

"Mark" means any visible sign capable of distinguishing the goods (trademark) or services
(service mark) of an enterprise and shall include a stamped or marked container of goods;
"Collective mark" means any visible sign designated as such in the application for registration
and capable of distinguishing the origin or any other common characteristic, including the quality of
goods or services of different enterprises which use the sign under the control of the registered
owner of the collective mark;479
"Trade name" means the name or designation identifying or distinguishing an enterprise.480
b. Acquisition of ownership of mark
The rights in a mark shall be acquired through registration made validly in accordance with
the provisions of this law.481
c. Acquisition of ownership of trade name
Prior use is the basis for ownership of trade names.
d. Non-registrable marks
A mark cannot be registered if it:
(a) Consists of immoral, deceptive or scandalous matter, or matter which may disparage or
falsely suggest a connection with persons, living or dead, institutions, beliefs, or national
symbols, or bring them into contempt or disrepute;
(b) Consists of the flag or coat of arms or other insignia of the Philippines or any of its
political subdivisions, or of any foreign nation, or any simulation thereof;
(c) Consists of a name, portrait or signature identifying a particular living individual except
by his written consent, or the name, signature, or portrait of a deceased President of the
Philippines, during the life of his widow, if any, except by written consent of the
widow;
(d) Is identical with a registered mark belonging to a different proprietor or a mark with an
earlier filing or priority date, in respect of:
1) The same goods or services, or
2) Closely related goods or services, or
3) If it nearly resembles such a mark as to be likely to deceive or cause confusion;
(e) Is identical with, or confusingly similar to, or constitutes a translation of a mark which
is considered by the competent authority of the Philippines to be well-known
479

Sec. 40
Sec. 121
481
Sec. 122
480

137

internationally and in the Philippines, whether or not it is registered here, as being

already the mark of a person other than the applicant for registration, and used for
identical or similar goods or services: Provided, That in determining whether a mark is
well-known, account shall be taken of the knowledge of the relevant sector of the
public, rather than of the public at large, including knowledge in the Philippines which
has been obtained as a result of the promotion of the mark;
(f)

Is identical with, or confusingly similar to, or constitutes a translation of a mark

considered well-known in accordance with the preceding paragraph, which is registered
in the Philippines with respect to goods or services which are not similar to those with
respect to which registration is applied for: Provided, That use of the mark in relation to
those goods or services would indicate a connection between those goods or services,
and the owner of the registered mark: Provided further, That the interests of the owner of
the registered mark are likely to be damaged by such use;

(g) Is likely to mislead the public, particularly as to the nature, quality, characteristics or
geographical origin of the goods or services;
(h) Consists exclusively of signs that are generic for the goods or services that they seek to
identify;
(i) Consists exclusively of signs or of indications that have become customary or usual to
designate the goods or services in everyday language or in bona fide and established
trade practice;
(j) Consists exclusively of signs or of indications that may serve in trade to designate the
kind, quality, quantity, intended purpose, value, geographical origin, time or production
of the goods or rendering of the services, or other characteristics of the goods or
services;
(k) Consists of shapes that may be necessitated by technical factors or by the nature of the
goods themselves or factors that affect their intrinsic value;
(l)

Consists of color alone, unless defined by a given form; or

(m) Is contrary to public order or morality.482

e. Prior use of mark as a requirement
The applicant or the registrant shall file a declaration of actual use of the mark with evidence
to that effect, as prescribed by the Regulations within three (3) years from the filing date of the
application. Otherwise, the application shall be refused or the mark shall be removed from the
Register by the Director.483
f. Tests to determine confusing similarity between marks
(1) Dominancy test
482

Sec. 123.1
Sec. 124.2

483

138

Infringement is determined by the test of dominancy rather than by differences or

variations in the details of one trademark and of another. Similarity in size, form and color, while
relevant, is not conclusive. If the competing trademark contains the main or essential or dominant
features of another, and confusion is likely to result, infringement takes place.484
(2) Holistic test
To determine whether a trademark has been infringed, we must consider the mark as a
whole and not as dissected. If the buyer is deceived, it is attributable to the marks as a totality, not
usually to any part of it. The court therefore should be guided by its first impression, for the buyer
acts quickly and is governed by a casual glance, the value of which may be dissipated as soon as the
court assumed to analyze carefully the respective features of the mark.485
g. Well-known marks
Identical with, or confusingly similar to, or constitutes a translation of a mark which is
considered by the competent authority of the Philippines to be well-known internationally and in the
Philippines, whether or not it is registered here, as being already the mark of a person other than the
applicant for registration, and used for identical or similar goods or services: Provided, That in
determining whether a mark is well-known, account shall be taken of the knowledge of the relevant
sector of the public, rather than of the public at large, including knowledge in the Philippines which
has been obtained as a result of the promotion of the mark.486
Identical with, or confusingly similar to, or constitutes a translation of a mark considered
well-known in accordance with the preceding paragraph, which is registered in the Philippines with
respect to goods or services which are not similar to those with respect to which registration is
applied for: Provided, That use of the mark in relation to those goods or services would indicate a
connection between those goods or services, and the owner of the registered mark: Provided further,
That the interests of the owner of the registered mark are likely to be damaged by such use.487
The exclusive right of the owner of a well-known mark defined in Subsection 123.1(e)488
which is registered in the Philippines, shall extend to goods and services which are not similar to
those in respect of which the mark is registered: Provided, That use of that mark in relation to those
goods or services would indicate a connection between those goods or services and the owner of the
registered mark: Provided, further, That the interests of the owner of the registered mark are likely to
be damaged by such use.489
h. Rights conferred by registration

484

Asia Brewery v. CA and San Miguel, 224 SCRA 437 [1993]

Del Monte Corporation, et al. v. CA, 181 SCRA 410 [1990]
486
Sec. 123.1(e)
487
Id.,(f)
488
supra
489
Sec. 147.2
485

139

The owner of a registered mark shall have the exclusive right to prevent all third parties not
having the owners consent from using in the course of trade identical or similar signs or containers
for goods or services which are identical or similar to those in respect of which the trademark is
registered where such use would result in a likelihood of confusion shall be presumed.
The exclusive right of the owner of a well-known mark which is registered in the Philippines
shall extend to goods and services which are similar to those in respect of which the mark is
registered; provided that use of the mark in relation to those goods or services would indicate a
connection between those goods and services and the owner of the registered mark; provided
further that the interest of the owner of the registered mark are likely to be damaged by such use.490
i. Use by third parties of names, etc. similar to registered mark
Any subsequent use of the trade name by a third party, whether as a trade name or a mark or
collective mark, or any such use of a similar trade name or mark, likely to mislead the public, shall be
deemed unlawful.491
j. Infringement and remedies
Any person who shall, without the consent of the owner of the registered mark:
1. Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a
registered mark or the same container or a dominant feature thereof in connection with the sale,
offering for sale, distribution, advertising of any goods or services including other preparatory steps
necessary to carry out the sale of any goods or services on or in connection with which such use is
likely to cause confusion, or to cause mistake, or to deceive;492 or
2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature
thereof and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs, prints,
packages, wrappers, receptacles or advertisements intended to be used in commerce upon or in
connection with the sale, offering for sale, distribution, or advertising of goods or services on or in
connection with which such use is likely to cause confusion, or to cause mistake, or to deceive, shall
be liable in a civil action for infringement by the registrant for the remedies hereinafter set forth:
Provided, That the infringement takes place at the moment any of the acts stated in Subsection
155.1. 493 or this subsection are committed regardless of whether there is actual sale of goods or
services using the infringing material.494
(1) Trademark infringement
To establish trademark infringement, the following elements must be shown: [1] the validity
of the mark; [2] the plaintiffs ownership of the mark; and [3] the use of the mark or its colorable
imitation by the alleged infringer results in likelihood of confusion. Of these, it is the element of
490

Sec. 147
Sec. 165 (b)
492
Sec. 155.1
493
supra
494
Id., (2)
491

140

likelihood of confusion that is the gravamen of trademark infringement. Two types of confusion
arise from the use of similar or colorable imitation marks, namely, confusion of goods 495 and
confusion of business. 496 While there is confusion of goods when the products are competing,
confusion of business exists when the products are non-competing but related enough to produce
confusion of affiliation.497
A crucial issue in any trademark infringement case is the likelihood of confusion, mistake or
deceit as to the identity, source or origin of the goods or identity of the business as a consequence of
using a certain mark. Likelihood of confusion is admittedly a relative term, to be determined rigidly
according to the particular (and sometimes peculiar) circumstances of each case. In determining
likelihood of confusion, the court must consider: [a] the resemblance between the trademarks; [b]
the similarity of the goods to which the trademarks are attached; [c] the likely effect on the
purchaser; and [d] the registrants express or implied consent and other fair and equitable
considerations.498
(2) Damages
The owner of a registered mark may recover damages from any person who infringes his
rights, and the measure of the damages suffered shall be either the reasonable profit which the
complaining party would have made, had the defendant not infringed his rights, or the profit which
the defendant actually made out of the infringement, or in the event such measure of damages
cannot be readily ascertained with reasonable certainty, then the court may award as damages a
reasonable percentage based upon the amount of gross sales of the defendant or the value of the
services in connection with which the mark or trade name was used in the infringement of the rights
of the complaining party.499
(3) Requirement of Notice
In any suit for infringement, the owner of the registered mark shall not be entitled to recover
profits or damages unless the acts have been committed with knowledge that such imitation is likely
to cause confusion, or to cause mistake, or to deceive. Such knowledge is presumed if the registrant
gives notice that his mark is registered by displaying with the mark the words "Registered Mark" or
the letter R within a circle or if the defendant had otherwise actual notice of the registration.500

k. Unfair competition501
495

product confusion
source or origin confusion
497
McDonalds Corporation v. L.C. Big Mak Burger, Inc., et al., 437 SCRA 10 [2004]
498
Mighty Corporation v. E. & J. Gallo Winery, 434 SCRA 473 [2004]
499
Sec. 156.1.
500
Sec. 158
501
Del Monte Corporation, et al. v. CA, 181 SCRA 410 [1990]
496

141

A person who has identified in the mind of the public the goods he manufactures or deals
in, his business or services from those of others, whether or not a registered mark is employed, has a
property right in the goodwill of the said goods, business or services so identified, which will be
protected in the same manner as other property rights.502
Any person who shall employ deception or any other means contrary to good faith by which
he shall pass off the goods manufactured by him or in which he deals, or his business, or services for
those of the one having established such goodwill, or who shall commit any acts calculated to
produce said result, shall be guilty of unfair competition, and shall be subject to an action therefor.503
In particular, and without in any way limiting the scope of protection against unfair
competition, the following shall be deemed guilty of unfair competition:
(a) Any person, who is selling his goods and gives them the general appearance of goods of
another manufacturer or dealer, either as to the goods themselves or in the wrapping of
the packages in which they are contained, or the devices or words thereon, or in any
other feature of their appearance, which would be likely to influence purchasers to
believe that the goods offered are those of a manufacturer or dealer, other than the
actual manufacturer or dealer, or who otherwise clothes the goods with such
appearance as shall deceive the public and defraud another of his legitimate trade, or
any subsequent vendor of such goods or any agent of any vendor engaged in selling
such goods with a like purpose;
(b) Any person who by any artifice, or device, or who employs any other means calculated
to induce the false belief that such person is offering the services of another who has
identified such services in the mind of the public; or
The following are the distinctions between infringement of trademark and unfair competition:
1. Infringement of trademark is the unauthorized use of a trademark, whereas unfair competition is the passing
off of ones goods as those of another.
2. In infringement of trademark, fraudulent intent is unnecessary, whereas in unfair competition fraudulent
intent is essential.
3. In infringement of trademark the prior registration of the trademark is a prerequisite to the action, whereas
in unfair competition registration is not necessary.
The law on unfair competition is broader and more inclusive than the law on trademark infringement. The
latter is more limited but it recognizes a more exclusive right derived from the trademark adoption and
registration by the person whose goods or business is first associated with it. Hence, even if one fails to establish
his exclusive property right to a trademark, he may still obtain relief on the ground of his competitors unfairness
or fraud. Conduct constitutes unfair competition if the effect is to pass off on the public the goods of one man as
the goods of another (Mighty Corporation v. E. & J. Gallo Winery, 434 SCRA 473 [2004])
The elements of an action for unfair competition are: [1] confusing similarity in the general appearance of the
goods, and [2] intent to deceive the public and defraud a competitor. The confusing similarity may or may not
result from similarity in the marks, but may result from other external factors in the packaging or presentation of
the goods. The intent to deceive and defraud may be inferred from the similarity in appearance of the goods as
offered for sale to the public. Actual fraudulent intent need not be shown. (McDonalds Corporation v. L.C. Big Mak
Burger, Inc., et al., 437 SCRA 10 [2004])
502
Sec. 168.1
503
Id., 2

142

(c) Any person who shall make any false statement in the course of trade or who shall
commit any other act contrary to good faith of a nature calculated to discredit the
goods, business or services of another.504
l. Trade names or business names
A name or designation may not be used as a trade name if by its nature or the use to which
such name or designation may be put, it is contrary to public order or morals and if, in particular, it
is liable to deceive trade circles or the public as to the nature of the enterprise identified by that
name.505
Notwithstanding any laws or regulations providing for any obligation to register trade names,
such names shall be protected, even prior to or without registration, against any unlawful act
committed by third parties.506
m. Collective marks
(a) An application for registration of a collective mark shall designate the mark as a collective
mark and shall be accompanied by a copy of the agreement, if any, governing the use of the
collective mark.
(b) The registered owner of a collective mark shall notify the Director of any changes made
in respect of the agreement referred to in paragraph (a).
In addition to the grounds provided in Section 149,507 the Court shall cancel the registration
of a collective mark if the person requesting the cancellation proves that only the registered owner
uses the mark, or that he uses or permits its use in contravention of the agreements referred to in
Subsection 166.2 or that he uses or permits its use in a manner liable to deceive trade circles or the
public as to the origin or any other common characteristics of the goods or services concerned.

504

Id., 3
Sec. 165.1
506
Id., 2 (a)
507
Assignment and Transfer of Application and Registration. An application for registration of a mark, or its registration, may be assigned or transferred with or without the
transfer of the business using the mark. (n)
Such assignment or transfer shall, however, be null and void if it is liable to mislead the public, particularly as
regards the nature, source, manufacturing process, characteristics, or suitability for their purpose, of the goods or
services to which the mark is applied.
The assignment of the application for registration of a mark, or of its registration, shall be in writing and require
the signatures of the contracting parties. Transfers by mergers or other forms of succession may be made by any
document supporting such transfer.
Assignments and transfers of registration of marks shall be recorded at the Office on payment of the prescribed
fee; assignment and transfers of applications for registration shall, on payment of the same fee, be provisionally
recorded, and the mark, when registered, shall be in the name of the assignee or transferee.
Assignments and transfers shall have no effect against third parties until they are recorded at the Office.
505

143

The registration of a collective mark, or an application therefor shall not be the subject of a
license contract.508
n. Criminal penalties for infringement, unfair competition, false designation
of origin, and false description or misrepresentation
A criminal penalty of imprisonment from two (2) years to five (5) years and a fine ranging
from Fifty thousand pesos (P50,000) to Two hundred thousand pesos(P200,000), shall be imposed
on any person who is found guilty of committing any of the acts mentioned.509
4. Copyrights
a. Basic principles
Works are protected by the sole fact of their creation, irrespective of their mode or form of
expression, as well as of their content, quality and purpose.510
Notwithstanding the provisions of Sections 172 and 173, 511 no protection shall extend,
under this law, to any idea, procedure, system method or operation, concept, principle, discovery or
mere data as such, even if they are expressed, explained, illustrated or embodied in a work.512
The copyright is distinct from the property in the material object subject to it. Consequently,
the transfer or assignment of the copyright shall not itself constitute a transfer of the material object.
Nor shall a transfer or assignment of the sole copy or of one or several copies of the work imply
transfer or assignment of the copyright.513
b. Copyrightable works
(1) Original works
Literary and artistic works, hereinafter referred to as "works", are original intellectual
creations in the literary and artistic domain protected from the moment of their creation and shall
include in particular:
(a)

Books, pamphlets, articles and other writings;

(b)
(c)

Periodicals and newspapers;

Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not
reduced in writing or other material form;

508

Sec. 167
Sec. 170
510
Sec. 172.2
Protection extends only to the expression of an idea, not the idea itself.
511
infra
512
Sec. 175
513
Sec. 181
509

144

(d)

Letters;

(e)

Dramatic or dramatico-musical compositions; choreographic works or entertainment

in dumb shows;

(f)

Musical compositions, with or without words;

(g)

Works of drawing, painting, architecture, sculpture, engraving, lithography or other

works of art; models or designs for works of art;

(h)

Original ornamental designs or models for articles of manufacture, whether or not

registrable as an industrial design, and other works of applied art;

(i)

Illustrations, maps, plans, sketches, charts and three-dimensional works relative to

geography, topography, architecture or science;

(j)

Drawings or plastic works of a scientific or technical character;

(k)

Photographic works including works produced by a process analogous to

photography; lantern slides;

(l)

Audiovisual works and cinematographic works and works produced by a process

analogous to cinematography or any process for making audio-visual recordings;

(m)

Pictorial illustrations and advertisements;

(n)

Computer programs; and

(o)

Other literary, scholarly, scientific and artistic works.514

(2) Derivative works

The following derivative works shall also be protected by copyright:

(a)

Dramatizations, translations, adaptations, abridgments, arrangements, and other

alterations of literary or artistic works; and

(b)

Collections of literary, scholarly or artistic works, and compilations of data and other
materials which are original by reason of the selection or coordination or arrangement
of their contents.515

The works referred to in paragraphs (a) and (b) of Subsection 173.1516 shall be protected as a
new works: Provided however, That such new work shall not affect the force of any subsisting

514

Sec. 172.1.
Sec. 173.1.
516
supra
515

145

copyright upon the original works employed or any part thereof, or be construed to imply any right
to such use of the original works, or to secure or extend copyright in such original works.517
c. Non-copyrightable works
No copyright shall subsist in any work of the Government of the Philippines. However,
prior approval of the government agency or office wherein the work is created shall be necessary for
exploitation of such work for profit. Such agency or office may, among other things, impose as a
condition the payment of royalties. No prior approval or conditions shall be required for the use of
any purpose of statutes, rules and regulations, and speeches, lectures, sermons, addresses, and
dissertations, pronounced, read or rendered in courts of justice, before administrative agencies, in
deliberative assemblies and in meetings of public character.518
The Author of speeches, lectures, sermons, addresses, and dissertations mentioned in the
preceding paragraphs shall have the exclusive right of making a collection of his works. 519
Notwithstanding the foregoing provisions, the Government is not precluded from receiving
and holding copyrights transferred to it by assignment, bequest or otherwise; nor shall publication or
republication by the government in a public document of any work in which copy right is subsisting
be taken to cause any abridgment or annulment of the copyright or to authorize any use or
appropriation of such work without the consent of the copyright owners.520
d. Rights of copyright owner
Subject to the provisions of Chapter VIII,521 copyright or economic rights shall consist of
the exclusive right to carry out, authorize or prevent the following acts:
1. Reproduction of the work or substantial portion of the work;
2. Dramatization, translation, adaptation, abridgment, arrangement or other transformation
of the work;
3. The first public distribution of the original and each copy of the work by sale or other
forms of transfer of ownership;
4. Rental of the original or a copy of an audiovisual or cinematographic work, a work
embodied in a sound recording, a computer program, a compilation of data and other materials or a
musical work in graphic form, irrespective of the ownership of the original or the copy which is the
subject of the rental; (n)
5. Public display of the original or a copy of the work;
6. Public performance of the work; and
7. Other communication to the public of the work522
517

Sec. 173.2.
Sec. 176.1
519
id., 2
520
Id., 3
521
Limitations on Copyright
518

146

e. Rules on ownership of copyright

1. In the case of original literary and artistic works, copyright shall belong to the author of
the work;
2. In the case of works of joint authorship, the co-authors shall be the original owners of the
copyright and in the absence of agreement, their rights shall be governed by the rules on coownership. If, however, a work of joint authorship consists of parts that can be used separately
and the author of each part can be identified, the author of each part shall be the original owner
of the copyright in the part that he has created;
3. In the case of work created by an author during and in the course of his employment, the
copyright shall belong to:
(a) The employee, if the creation of the object of copyright is not a part of his regular
duties even if the employee uses the time, facilities and materials of the employer.
(b) The employer, if the work is the result of the performance of his regularly-assigned
duties, unless there is an agreement, express or implied, to the contrary.
4. In the case of a work-commissioned by a person other than an employer of the author
and who pays for it and the work is made in pursuance of the commission, the person who so
commissioned the work shall have ownership of work, but the copyright thereto shall remain
with the creator, unless there is a written stipulation to the contrary;
5. In the case of audiovisual work, the copyright shall belong to the producer, the author of
the scenario, the composer of the music, the film director, and the author of the work so
adapted. However, subject to contrary or other stipulations among the creators, the producers
shall exercise the copyright to an extent required for the exhibition of the work in any manner,
except for the right to collect performing license fees for the performance of musical
compositions, with or without words, which are incorporated into the work; and
6. In respect of letters, the copyright shall belong to the writer subject to the provisions of
Article 723523 of the Civil Code.524
f. Limitations on copyright
Notwithstanding the provisions of Chapter V, 525 the following acts shall not constitute
infringement of copyright:

522

Sec. 177
Letters and other private communications in writing are owned by the person to whom they are addressed and
delivered, but they cannot be published or disseminated without the consent of the writer or his heirs. However,
the court may authorize their publication or dissemination if the public good or the interest of justice so requires.
524
Sec. 178
525
Copyright or Economic Rights
523

147

(a)

the recitation or performance of a work, once it has been lawfully made accessible to
the public, if done privately and free of charge or if made strictly for a charitable or
religious institution or society;

(b)

The making of quotations from a published work if they are compatible with fair use
and only to the extent justified for the purpose, including quotations from newspaper
articles and periodicals in the form of press summaries: Provided, That the source and
the name of the author, if appearing on the work, are mentioned;

(c)

The reproduction or communication to the public by mass media of articles on

current political, social, economic, scientific or religious topic, lectures, addresses and
other works of the same nature, which are delivered in public if such use is for
information purposes and has not been expressly reserved: Provided, That the source is
clearly indicated;

(d)

The reproduction and communication to the public of literary, scientific or artistic

works as part of reports of current events by means of photography, cinematography
or broadcasting to the extent necessary for the purpose;

(e)

The inclusion of a work in a publication, broadcast, or other communication to the

public, sound recording or film, if such inclusion is made by way of illustration for
teaching purposes and is compatible with fair use: Provided, That the source and of the
name of the author, if appearing in the work, are mentioned;

(f)

The recording made in schools, universities, or educational institutions of a work

included in a broadcast for the use of such schools, universities or educational
institutions: Provided, That such recording must be deleted within a reasonable period
after they were first broadcast: Provided, further, That such recording may not be made
from audiovisual works which are part of the general cinema repertoire of feature
films except for brief excerpts of the work;

(g)

The making of ephemeral recordings by a broadcasting organization by means of its

own facilities and for use in its own broadcast;

(h)

The use made of a work by or under the direction or control of the Government, by
the National Library or by educational, scientific or professional institutions where
such use is in the public interest and is compatible with fair use;
The public performance or the communication to the public of a work, in a place
where no admission fee is charged in respect of such public performance or
communication, by a club or institution for charitable or educational purpose only,
whose aim is not profit making, subject to such other limitations as may be provided
in the Regulations;

(i)

(j)

Public display of the original or a copy of the work not made by means of a film, slide,
television image or otherwise on screen or by means of any other device or process:
Provided, That either the work has been published, or, that original or the copy
displayed has been sold, given away or otherwise transferred to another person by the
author or his successor in title; and
148

(k)

Any use made of a work for the purpose of any judicial proceedings or for the giving
of professional advice by a legal practitioner.

The provisions of this section shall be interpreted in such a way as to allow the work to be
used in a manner which does not conflict with the normal exploitation of the work and does not
unreasonably prejudice the right holder's legitimate interest.526
(1) Doctrine of fair use
The fair use of a copyrighted work for criticism, comment, news reporting, teaching
including multiple copies for classroom use, scholarship, research, and similar purposes is not an
infringement of copyright. Decompilation, which is understood here to be the reproduction of the
code and translation of the forms of the computer program to achieve the inter-operability of an
independently created computer program with other programs may also constitute fair use. In
determining whether the use made of a work in any particular case is fair use, the factors to be
considered shall include:
(a)

The purpose and character of the use, including whether such use is of a commercial
nature or is for non-profit education purposes;

(b)

The nature of the copyrighted work;

(c)

The amount and substantiality of the portion used in relation to the copyrighted work
as a whole; and

(d)

The effect of the use upon the potential market for or value of the copyrighted work.

The fact that a work is unpublished shall not by itself bar a finding of fair use if such finding
is made upon consideration of all the above factors.527
(2) Copyright infringement
Infringement consists in the doing by any person, without the consent of the owner of the
copyright, of anything the sole right to do which is conferred by statute on the owner of the
copyright. The act of lifting from anothers book substantial portions of discussions and examples
and the failure to acknowledge the same is an infringement of copyright. For there to be substantial
reproduction of a book it does not necessarily require that the entire copyrighted work, or even a
large portion of it, be copied. If so much is taken that the value of the original work is substantially
diminished, there is an infringement of copyright and to an injurious extent, the work is
appropriated. It is no defense that the pirate did not know whether or not he was infringing any
copyright; he at least knew that what he was copying was not his, and he copied at his peril. In cases
of infringement, copying alone is not what is prohibited. The copying must produce an injurious
effect.528
526

Sec. 184
Sec. 185
528
Habana, et al., v. Robles, et al., 310 SCRA 511 [1999]
527

149

(a) Remedies
1. Civil Action
Any person infringing a right protected under this law shall be liable:
(a)

(b)

(c)

(d)
(e)

To an injunction restraining such infringement. The court may also order the
defendant to desist from an infringement, among others, to prevent the entry into
the channels of commerce of imported goods that involve an infringement,
immediately after customs clearance of such goods.
Pay to the copyright proprietor or his assigns or heirs such actual damages,
including legal costs and other expenses, as he may have incurred due to the
infringement as well as the profits the infringer may have made due to such
infringement, and in proving profits the plaintiff shall be required to prove sales
only and the defendant shall be required to prove every element of cost which he
claims, or, in lieu of actual damages and profits, such damages which to the court
shall appear to be just and shall not be regarded as penalty.
Deliver under oath, for impounding during the pendency of the action, upon such
terms and conditions as the court may prescribe, sales invoices and other
documents evidencing sales, all articles and their packaging alleged to infringe a
copyright and implements for making them.
Deliver under oath for destruction without any compensation all infringing copies
or devices, as well as all plates, molds, or other means for making such infringing
copies as the court may order.
Such other terms and conditions, including the payment of moral and exemplary
damages, which the court may deem proper, wise and equitable and the
destruction of infringing copies of the work even in the event of acquittal in a
criminal case.

In an infringement action, the court shall also have the power to order the seizure and
impounding of any article which may serve as evidence in the court proceedings.529
2. Criminal Action
Any person infringing any right secured by provisions of Part IV 530 of this Act or aiding or
abetting such infringement shall be guilty of a crime punishable by:
(a) Imprisonment of one (1) year to three (3) years plus a fine ranging from Fifty
thousand pesos (P50,000) to One hundred fifty thousand pesos (P150,000) for the
first offense.
529
530

Sec. 216
Works Not Protected

150

(b) Imprisonment of three (3) years and one (1) day to six (6) years plus a fine ranging
from One hundred fifty thousand pesos (P150,000) to Five hundred thousand pesos
(P500,000) for the second offense.
(c) Imprisonment of six (6) years and one (1) day to nine (9) years plus a fine ranging
from Five hundred thousand pesos (P500,000) to One million five hundred
thousand pesos (P1,500,000) for the third and subsequent offenses.
(d) In all cases, subsidiary imprisonment in cases of insolvency.
In determining the number of years of imprisonment and the amount of fine, the court shall
consider the value of the infringing materials that the defendant has produced or manufactured and
the damage that the copyright owner has suffered by reason of the infringement.
Any person who at the time when copyright subsists in a work has in his possession an
article which he knows, or ought to know, to be an infringing copy of the work for the purpose of:
(a) Selling, letting for hire, or by way of trade offering or exposing for sale, or hire, the
article;
(b) Distributing the article for purpose of trade, or for any other purpose to an extent
that will prejudice the rights of the copyright owner in the work; or
(c) Trade exhibit of the article in public, shall be guilty of an offense and shall be liable
on conviction to imprisonment and fine as above mentioned.531
K. Special Laws
A. Anti-Money LaunderingLaw532
a. Policy of the law
1. To protect and preserve the integrity and confidentiality of bank accounts, to ensure that
the Philippines shall not be used as a site for unlawful money laundering activities; and
2. To pursue States foreign policy to extend cooperation in transnational investigations and
prosecution on money laundering activities.
b. Covered institutions
a. Banks
531

Sec. 217
RA 9160, as amended by RA 9194
Anti-Money Laundering
A crime whereby the proceeds of an unlawful activity are translated thereby making them appear to
have originated from legitimate sources.
532

151

b. Non-banks
c. Quasi-banks
d. Trust entities; and
e. All other institutions, their subsidiaries and affiliates supervised or regulated by the BSP
c. Obligations of covered institutions
To report transactions being coursed through them that may have tell-tale signs of money
laundering, which transactions are called "covered transactions.533
d. Covered transactions
Transaction, in cash or other equivalent monetary instrument in excess of P500,000, within
one banking day
e. Suspicious transactions
Transactions with covered institutions regardless of the amounts involved, where any of the
following circumstances exists:
a. There is no underlying legal or trade obligation.
b. Client is not properly identified
c. Amount involved is not commensurate with the business or financial capacity
d. Taking into account all known circumstances, it may be perceived that the clients
transaction is structured in order to avoid being the subject of reporting requirements under the Act.
e. Any circumstances relating to the transaction which is observed to deviate from the
profile and/ or the clients past transactions with the covered institution.
f. Transaction is in any way related to an unlawful activity or offense under this Act that is
about to be, is being or has been committed.
g. Analogous transactions to any of the foregoing.534
f. When is money laundering committed
Crime of money laundering:
1. Knowledge that any monetary instrument or property represents, involved or relates the
proceeds of any unlawful activity, transact or attempts to transact said monetary instrument or
property
533
534

See Sec. 9
Sec. 2, R.A. 9194

152

2. Knowledge that any monetary instrument or property involves proceeds of any unlawful
activity, performs or fails to perform any act as a result of which he facilitates the offense of money
laundering
3. Knowledge that any monetary instrument or instrument is required to be disclosed and
filed with AMLC535 fails to do so.
g. Unlawful activities or predicate crimes
1. drug trafficking or violation of RA No. 9165536
2. kidnap for ransom
3. anti-graft and corrupt practices act
4. plunder
5. robbery and extortion
6. juetengandmasiao ( illegal gambling)
7. piracy on the high seas
8. qualified theft
9. swindling
10. smuggling537
11. violations of E-commerce Act of 2000
12. hijacking
h. Anti-Money Laundering Council (AMLC)
Composition:
1. Governor of BangkoSentralngPilipinas as Chairman
2. Insurance Commissioner
3. Chairman of Security & Exchange Commissioner
each.538

AMLC is a collegial body where Chairman & members of AMLC are entitled to one vote

535

infra
Comprehensive Dangerous Act of 2002
537
under RPC and R.A. Nos. 455 & 1937
536

153

i. Functions
1. To require and receive covered or suspicious transaction reports from covered institution
2. All covered transactions and suspicious transactions shall be reported to AMLC within 5
working days from occurrence thereof, unless the Supervising Authority prescribes a longer period
not exceeding 10 working days.
3. To issue orders addressed to the appropriate supervising authority or the covered
institution to determine the true identity of the owner of any monetary instrument or property
subject of a covered transaction or suspicious transaction report or request for assistance from a
foreign state, or believed by the council, on the basis of substantial evidence, to be in whole or in
part, wherever located representing, involving, or related to, directly or indirectly, in any manner or
by any means, the proceeds of an unlawful activity.
4. To institute civil forfeiture proceedings and all other remedial proceedings through the
Office of the Solicitor General.
5. To cause the filing of complaints with the Department of Justice or the Ombudsman for
the prosecution of money laundering offenses.
6. To investigate suspicious transactions deemed suspicious after an investigation by the
AMLC, money laundering activities, and other violations of this Act.
7. To apply before the Court of Appeals, ex parte, for the freezing of any monetary
instrument or property alleged to be the proceeds of any unlawful activity.539
8. To implement such measures as may be necessary and justified under the law to
counteract money laundering.
9. To receive and take action in respect to any request from foreign states for assistance in
their own anti-money laundering operations.540
538

General Rule:
AMLC acts unanimously in discharge of functions.
Exception:
In case of incapacity, absence or disability, any member to discharge his functions, the officer designated shall act
in his stead.
General Rule:
Members of AMLC, Executive Director, all members of Secretariat, on detail, on secondment shall not reveal in any
manner any information by reason of their office
Exception:
Under any orders of the court, Congress, or any government offices authorized by law.
539
effective immediately upon determination of probable cause
shall be for a period of 20 days unless extended by the court
540
through conventions, resolutions & other directives of any organizations of which Philippines is a member.
However, AMLC may refuse to comply with such request, when:

154

10. To develop educational programs on the pernicious effects of money laundering, the
methods and techniques used in money laundering, the viable means of preventing money
laundering and the effective ways of prosecuting and punishing offender.541
11. To enlist the assistance of any branch, department, bureau, office, agency or
instrumentality of the government including government-owned and controlled corporations in
undertaking any and all anti-money laundering operations, which may include the use of its
personnel, facilities and resources for the more resolute prevention, detection and investigation of
money laundering offense and prosecution of offenders
12. To impose administrative sanctions for the violation of laws, rules, regulations and
orders and resolutions.
j. Freezing of monetary instrument or property542
k. Authority to inquire into bank deposits
Inquire into or examine any particular deposit or investment with any banking institution or
non-bank financial institution upon order of any competent court in cases of violation of the law,
when it has been established that there is probable cause that the deposits or investments are related
to an unlawful activity or a money laundering offense except that no court is needed for cases
qualified by the law.
5. Foreign Investments Act543
a. Policy of the law
It is the policy of the State to attract, promote and welcome productive investments from
foreign individuals, partnerships, corporations, and governments, including their political
subdivisions, in activities which significantly contribute to national industrialization and
socioeconomic development to the extent that foreign investment is allowed in such activity by the
Constitution and relevant laws. Foreign investments shall be encouraged in enterprises that
significantly expand livelihood and employment opportunities for Filipinos; enhance economic value
of farm products; promote the welfare of Filipino consumers; expand the scope, quality and volume
of exports and their access to foreign markets; and/or transfer relevant technologies in agriculture,
a. it contravenes provision of Constitution
b. it prejudices national interest of the Philippines
Requirements for requests for mutual assistance from foreign sates:
a. investigation/prosecution
b. grounds
c. identity of said person
d. covered institution believed to have been any information which may be of assistance to the investigation
e. all particulars necessary for the issuance of the order/processes
f. other information
541
through nationwide information campaigns
to heighten awareness of the public of their civic duty
542
See i. Functions, No. 7, supra
543
R.A. No. 7042

155

industry and support services. Foreign investments shall be welcome as a supplement to Filipino
capital and technology in those enterprises serving mainly the domestic market.
As a general rule, there are no restrictions on extent of foreign ownership of export
enterprises. In domestic market enterprises, foreigners can invest as much as one hundred percent
(100%) equity except in areas included in the negative list. Foreign owned firms catering mainly to
the domestic market shall be encouraged to undertake measures that will gradually increase Filipino
participation in their businesses by taking in Filipino partners, electing Filipinos to the board of
directors, implementing transfer of technology to Filipinos, generating more employment for the
economy and enhancing skills of Filipino workers.544
b. Definition of terms
(1) Foreign investment
Equity investment made by a non-Philippine national in the form of foreign exchange
and/or other assets actually transferred to the Philippines and duly registered with the Central Bank
which shall assess and appraise the value of such assets other than foreign exchange.545
(2) "Doing business" in the Philippines
Include soliciting orders, service contracts, opening offices, whether called "liaison" offices
or branches; appointing representatives or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or
more; participating in the management, supervision or control of any domestic business, firm, entity
or corporation in the Philippines; and any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the performance of acts or works, or the
exercise of some of the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business organization: Provided, however, That
the phrase "doing business: shall not be deemed to include mere investment as a shareholder by a
foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights
as such investor; nor having a nominee director or officer to represent its interests in such
corporation; nor appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account.546
(3) Export enterprise
An enterprise which produces goods for sale, or renders services to the domestic market
entirely or if exporting a portion of its output fails to consistently export at least sixty percent (60%)
thereof.547
(4) Domestic market enterprise

544

Sec. 2
Sec. 3
546
Ibid.
547
Ibid.
545

156

An enterprise which produces goods for sale, or renders service or otherwise engages in any
business in the Philippines.548
c. Registration of investments of non-Philippine nationals
Without need of prior approval, a non-Philippine national, as that term is defined in Section
3 a), and not otherwise disqualified by law may upon registration with the Securities and Exchange
Commission (SEC), or with the Bureau of Trade Regulation and Consumer Protection (BTRCP) of
the Department of Trade and Industry in the case of single proprietorships, do business as defined
in Section 3 (d) of this Act or invest in a domestic enterprise up to one hundred percent (100%) of
its capital, unless participation of non-Philippine nationals in the enterprise is prohibited or limited
to a smaller percentage by existing law and/or limited to a smaller percentage by existing law and/or
under the provisions of this Act. The SEC or BTRCP, as the case may be, shall not impose any
limitations on the extent of foreign ownership in an enterprise additional to those provided in this
Act: Provided, however, That any enterprise seeking to avail of incentives under the Omnibus
Investment Code of 1987 must apply for registration with the Board of Investments (BOI), which
shall process such application for registration in accordance with the criteria for evaluation
prescribed in said Code: Provided, finally, That a non-Philippine national intending to engage in the
same line of business as an existing joint venture in his application for registration with SEC. During
the transitory period as provided in Section 15 hereof, SEC shall disallow registration of the applying
non-Philippine national if the existing joint venture enterprise, particularly the Filipino partners
therein, can reasonably prove they are capable to make the investment needed for they are
competing applicant. Upon effectivity of this Act, SEC shall effect registration of any enterprise
applying under this Act within fifteen (15) days upon submission of completed requirements.549
d. Foreign investments in export enterprises
Foreign investment in export enterprises whose products and services do not fall within
Lists A and B of the Foreign Investment Negative List provided under Section 8 hereof is allowed
up to one hundred percent (100%) ownership.
Export enterprises which are non-Philippine nationals shall register with BOI and submit the
reports that may be required to ensure continuing compliance of the export enterprise with its
export requirement. BOI shall advise SEC or BTRCP, as the case may be, of any export enterprise
that fails to meet the export ratio requirement. The SEC or BTRCP shall thereupon order the noncomplying export enterprise to reduce its sales to the domestic market to not more than forty
percent (40%) of its total production; failure to comply with such SEC or BTRCP order, without
justifiable reason, shall subject the enterprise to cancellation of SEC or BTRCP registration, and/or
the penalties provided in Section 14 hereof.550
e. Foreign investments in domestic market enterprises

548

Sec. 1 (k), Implementing Rules & Regulations of the Foreign Investments Act of 1991
Sec. 5
550
Sec. 6
549

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Non-Philippine nationals may own up to one hundred percent (100%) of domestic market
enterprises unless foreign ownership therein is prohibited or limited by existing law or the Foreign
Investment Negative List under Section 8 hereof.
A domestic market enterprise may change its status to export enterprise if over a three (3)
year period it consistently exports in each year thereof sixty per cent (60%) or more of its output.551
f. Foreign Investment Negative List
The Foreign Investment Negative List shall have three (3) component lists: A, B, and C:
a) List A shall enumerate the areas of activities reserved to Philippine nationals by mandate
of the Constitution and specific laws.
b) List B shall contain the areas of activities and enterprises pursuant to law:
1) Which are defense-related activities, requiring prior clearance and authorization
from Department of National Defense (DND) to engage in such activity, such as the
manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons,
military ordnance, explosives, pyrotechnics and similar materials; unless such manufacturing
or repair activity is specifically authorized, with a substantial export component, to a nonPhilippine national by the Secretary of National Defense; or
2) Which have implications on public health and morals, such as the manufacture
and distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beerhouses,
dance halls; sauna and steambath houses and massage clinics.
Small and medium-sized domestic market enterprises with paid-in equity capital less than the
equivalent of five hundred thousand US dollars (US$500,000) are reserved to Philippine nationals,
unless they involve advanced technology as determined by the Department of Science and
Technology. Export enterprises which utilize raw materials from depleting natural resources, with
paid-in equity capital of less than the equivalent of five hundred thousand US dollars (US$500,000)
are likewise reserved to Philippine nationals.
Amendments to List B may be made upon recommendation of the Secretary of National
Defense, or the Secretary of Health, or the Secretary of Education, Culture and Sports, indorsed by
the NEDA, or upon recommendation motupropio of NEDA, approved by the President, and
promulgated by Presidential Proclamation.
c) List C shall contain the areas of investment in which existing enterprises already serve
adequately the needs of the economy and the consumer and do not require further foreign
investments, as determined by NEDA applying the criteria provided in Section 9 of this Act,
approved by the President and promulgated in a Presidential Proclamation.

551

Sec. 7

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